Maximizing 2025 Deductions Before 2026 Tax Season

With 2025 coming to a close, now is the time for strategic year-end tax planning. The decisions you make between now and December 31 can significantly impact your 2025 tax bill when you file in 2026. For California business owners and high earners in the Bay Area, proper planning can save thousands—or even tens of thousands—of dollars.

This guide covers the most valuable deductions and strategies available to Fremont, Silicon Valley, and Bay Area taxpayers before the year ends, including updates from the One Big Beautiful Bill Act that passed in July 2025.

Why Year-End Tax Planning Matters

Year-end tax planning isn't just about reducing taxes—it's about strategic financial management that positions your business for success.

Benefits of proactive planning:

• Reduce current year tax liability
• Improve cash flow in the coming year
• Make informed business investment decisions
• Take advantage of expiring tax benefits
• Avoid underpayment penalties

The clock is ticking: Many deductions must be completed by December 31, 2025 to count for your 2025 tax return. Others can be made early in 2026 and still apply retroactively.

Section 179 Equipment Deduction: Use It or Lose It

Section 179 allows businesses to deduct the full cost of qualifying equipment purchases in the year purchased, rather than depreciating over several years.

2025 limits:

• Maximum deduction: $1,220,000 (2025 amount)
• Phase-out threshold: $3,050,000
• 100% bonus depreciation: Still available but phasing down to 60% for property placed in service in 2024-2025

Qualifying property:

• Machinery and equipment
• Business vehicles (with limits)
• Computers and software
• Office furniture and fixtures
• Certain qualified improvement property

Example: A Fremont manufacturing company purchases $500,000 in equipment in December 2025:

• Section 179 deduction: $500,000 (full amount)
• Tax savings at 37% rate: $185,000

Critical deadlines:

• Equipment must be purchased AND placed in service by December 31, 2025
• "Placed in service" means operational and ready to use

Planning tips:

• Accelerate planned 2026 purchases to 2025 if beneficial
• Consider financing options—financed equipment still qualifies
• Document the "placed in service" date carefully

Bay Area considerations: Many tech companies purchase servers, computers, and software. All can qualify for Section 179 deduction.

Bonus Depreciation Phase-Down

Bonus depreciation is being phased out:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027 and later: 0%

Strategy: If you can't use full Section 179 (due to income limitations), bonus depreciation provides an additional deduction of 40% in 2025.

Combined approach: Section 179 up to income limit, then bonus depreciation on remaining amounts.

Business Expense Acceleration

Deductible business expenses can be accelerated into 2025 to reduce current year taxes.

Prepaid Expenses

What you can prepay:

• Rent (up to 12 months in advance)
• Insurance premiums
• Subscriptions and memberships
• Software licenses (annual subscriptions)
• Professional association dues

Example: Union City consulting firm prepays:

• January-December 2026 office rent: $36,000
• Annual insurance premium due February 2026: $12,000
• Software subscriptions for 2026: $8,000
• Total 2025 deduction: $56,000

Rules to follow:

• Payment must be made by December 31, 2025
• Benefit period must not extend beyond 12 months
• Must be ordinary and necessary business expense
• Cash-basis taxpayers only (accrual-basis taxpayers cannot use this strategy as freely)

Accounts Payable Management

For accrual-basis taxpayers, ensure all 2025 expenses are properly recorded, even if not yet paid.

Deductible when:

• All events establishing liability have occurred
• Amount can be determined with reasonable accuracy
• Economic performance has occurred

Year-end review:

• Outstanding vendor invoices
• Accrued bonuses to employees
• Professional fees (legal, accounting, consulting)
• Utilities and other recurring expenses

Retirement Plan Contributions

Maximizing retirement contributions reduces taxable income while building long-term wealth.

Business Owner Options

SEP-IRA (Simplified Employee Pension):

• Contribution limit: Up to 25% of compensation or $69,000 (2024-2025)
• Deadline: Tax return due date (including extensions)
• Can be established and funded after year-end

Solo 401(k) (for self-employed with no employees except spouse):

• Employee contribution: $23,000 ($30,500 if age 50+)
• Employer contribution: Up to 25% of compensation
• Combined limit: $69,000 ($76,500 if age 50+)
• Must be established by December 31, 2025
• Can be funded until tax return deadline

SIMPLE IRA:

• Employee contribution: $16,000 ($19,500 if age 50+)
• Employer match: Required 2-3%
• Must be established by October 1 to use for current year

Traditional 401(k) (for businesses with employees):

• Employee contribution: $23,000 ($30,500 if age 50+)
• Employer contribution: Various options
• Combined limit: $69,000
• Deadlines vary by plan document

Example: San Jose small business owner age 52:

• Solo 401(k) employee contribution: $30,500
• Employer contribution (25% of $200,000): $50,000
• Total contribution: $76,500 (maximum for age 50+)
• Tax savings at 37%: $28,305

Important: Solo 401(k)s must be established by December 31, 2025, but SEP-IRAs can be established and funded as late as your tax return deadline (including extensions).

Roth Conversion Strategies

In lower-income years, consider converting traditional IRA funds to Roth IRAs.

Why 2025 might be a good conversion year:

• Business had a down year (lower income)
• Large deductions reduced taxable income
• Expecting higher income in future years

Trade-off: Pay tax now at current rate to avoid tax later at potentially higher rates.

California LLC Fee Avoidance Strategies

California LLCs face annual fees based on gross receipts. Strategic planning can reduce these fees.

Gross Receipts Thresholds

• $0 - $249,999: $0 fee (plus $800 franchise tax)
• $250,000 - $499,999: $900 fee
• $500,000 - $999,999: $2,500 fee
• $1,000,000 - $4,999,999: $6,000 fee
• $5,000,000+: $11,790 fee

Planning Strategies

If approaching $250,000 threshold:

• Consider deferring late-December revenue to January
• Accelerate expenses into December
• Evaluate S corporation election (S corps don't pay this fee)

Example: LLC projects $260,000 in gross receipts:

• Defer $15,000 December billing to January 2026
• 2025 gross receipts: $245,000 (no fee)
• Savings: $900 fee avoided

S corporation election:

• Avoids LLC fee entirely
• Pays 1.5% tax on net income plus $800 minimum
• May save self-employment tax
• Requires reasonable salary to owner

Analysis needed: Compare total tax burden (federal + California) for LLC vs. S corp election.

Charitable Contributions

Charitable giving reduces taxable income while supporting causes you care about.

Deduction Limits

Cash contributions:

• Limit: 60% of AGI for public charities
• Excess carries forward 5 years

Appreciated property:

• Limit: 30% of AGI
• Deduct fair market value (avoid capital gains tax)
• Excess carries forward 5 years

Example: Fremont business owner:

• AGI: $500,000
• Cash donation limit: $300,000 (60%)
• Appreciated stock donation limit: $150,000 (30%)

Strategies for Maximum Benefit

Donate appreciated stock instead of cash:

• No capital gains tax on appreciation
• Full fair market value deduction

Example:

• Stock purchased for $10,000, now worth $50,000
• Donate stock directly to charity
• Deduction: $50,000
• Capital gains avoided: $40,000 × 20% = $8,000
• Additional tax savings: $50,000 × 37% = $18,500
• Total benefit: $26,500

Bunching contributions:

With higher standard deductions ($15,750 single, $31,500 married filing jointly for 2025), some taxpayers don't have enough deductions to itemize.

Strategy: Bunch 2 years of donations into 1 year:

• Donate $20,000 in 2025 (itemize)
• Donate $0 in 2026 (standard deduction)
• Instead of $10,000 each year (standard deduction both years)

Donor-Advised Funds (DAFs):

• Contribute large amount in high-income year
• Get immediate deduction
• Distribute to charities over multiple years
• Invest funds for growth

Qualified Charitable Distributions (QCDs):

• Age 70½+: Direct IRA distribution to charity
• Up to $105,000 per year (2024-2025)
• Not included in income
• Counts toward RMD (Required Minimum Distribution)

New 0.5% Floor for High Earners

The One Big Beautiful Bill Act introduced a 0.5% of income floor for charitable deductions for those in the top tax bracket.

Example: Income of $500,000:

• Floor: $2,500 (0.5%)
• Donate $10,000
• Deductible amount: $7,500 (amount over floor)

Planning tip: Makes bunching contributions even more valuable for high earners.

Home Office Deduction

If you work from home, a home office deduction can provide significant savings.

Qualifying for the Deduction

Requirements:

• Regular and exclusive use
• Principal place of business, OR
• Place to meet clients/customers

Exclusive use: The space must be used ONLY for business (no personal use)

Calculation Methods

Simplified method:

• $5 per square foot
• Maximum 300 square feet
• Maximum deduction: $1,500

Actual expense method:

• Calculate business use percentage
• Deduct that percentage of:
  • Mortgage interest or rent
  • Property taxes
  • Utilities
  • Insurance
  • Repairs and maintenance
  • Depreciation

Example: Fremont home office:

• Home: 2,000 square feet
• Office: 200 square feet
• Business use percentage: 10%
• Annual home expenses: $40,000
• Deduction: $4,000

W-2 employees: Cannot deduct home office (TCJA eliminated unreimbursed employee expense deductions through 2025)

Self-employed and business owners: Can still claim home office deduction

Vehicle and Mileage Deductions

Business use of vehicles provides valuable deductions.

Standard Mileage Rate Method

2025 rates:

• Business: 67 cents per mile
• Medical/moving: 21 cents per mile
• Charitable: 14 cents per mile (set by law)

Requirements:

• Must track miles contemporaneously (at time of travel)
• Must document business purpose
• Must use standard mileage from first year vehicle in business use

Example: 15,000 business miles in 2025:

• Deduction: 15,000 × $0.67 = $10,050

Actual Expense Method

Deductible expenses:

• Gas and oil
• Repairs and maintenance
• Insurance
• Registration fees
• Depreciation or lease payments
• Parking and tolls (always 100% deductible with either method)

Business use percentage: Total vehicle expenses × business use percentage

Example:

• Total vehicle expenses: $15,000
• Total miles driven: 20,000
• Business miles: 15,000
• Business use: 75%
• Deduction: $15,000 × 75% = $11,250

Heavy SUVs: Section 179 deduction limits are higher for vehicles over 6,000 pounds GVWR

Health Insurance Deductions

Health insurance premiums can be a significant deductible expense.

Self-Employed Health Insurance Deduction

Who qualifies:

• Self-employed individuals
• Partners in partnerships
• S corporation shareholders owning more than 2%

What's deductible:

• Health insurance premiums
• Dental insurance
• Long-term care insurance (within limits)
• Coverage for spouse and dependents

Deduction type: Above-the-line deduction (reduces AGI)

Limitations:

• Cannot exceed net self-employment income
• Cannot double-dip with premium tax credit

Example: Self-employed consultant:

• Family health insurance: $24,000/year
• Dental insurance: $3,000/year
• Total deduction: $27,000
• Tax savings at 37%: $9,990

Health Savings Accounts (HSAs)

If you have a high-deductible health plan, HSA contributions are deductible.

2025 contribution limits:

• Individual: $4,150
• Family: $8,300
• Age 55+ catch-up: $1,000

Triple tax advantage:

• Tax-deductible contributions
• Tax-free growth
• Tax-free withdrawals for medical expenses

Deadline: April 15, 2026 (can contribute after year-end)

Education and Training Expenses

Business-related education is deductible.

Qualifying education:

• Maintains or improves skills in current business
• Required by law or regulations
• Does NOT qualify you for a new trade or business

Deductible expenses:

• Tuition and fees
• Books and supplies
• Transportation to classes

Example: Software developer takes advanced coding bootcamp:

• Cost: $5,000
• Improves current skills: Yes
• New trade: No
• Deductible: $5,000

Entertainment and Meal Deductions

Business meal and entertainment rules changed significantly under TCJA, with updates under the One Big Beautiful Bill Act.

Business Meals

Generally 50% deductible:

• Meals with clients or customers
• Meals while traveling for business
• Meals at conferences

100% deductible (temporary provisions expiring):

• Check current law for any temporary 100% deductions

Non-deductible:

• Entertainment expenses (sports tickets, golf outings, etc.)
• Club memberships
• Facilities used for entertainment

Documentation requirements:

• Amount spent
• Date and place
• Business purpose
• Business relationship of attendees

On-Premises Employee Meals

The One Big Beautiful Bill Act created exemptions for certain businesses providing on-premises employee meals.

Qualifying situations:

• Provided for employer's convenience
• On business premises
• To more than 50% of employees

Bay Area tech companies: This could restore deductions for employee cafeterias and meal programs.

Year-End Tax Planning Checklist

By December 15, 2025:

• Calculate projected 2025 income and tax liability
• Identify needed equipment purchases
• Review accounts payable and prepaid expense opportunities
• Assess retirement plan contribution room
• Plan charitable giving strategy
• Review contractor classifications for new $2,000 threshold

By December 31, 2025:

• Make equipment purchases and place in service
• Pay prepaid expenses
• Make charitable contributions
• Establish Solo 401(k) if using
• Complete any Section 179 purchases
• Review and adjust W-4 withholding
• Make final estimated tax payment (if due 1/15/26)

By April 15, 2026:

• Make final retirement plan contributions (SEP-IRA)
• File tax return or extension
• Fund HSA for 2025

Working with FK Services

Year-end tax planning requires expertise and strategic thinking. FK Services helps Bay Area businesses and individuals maximize deductions while staying compliant.

Our year-end planning services:

• Comprehensive tax projection modeling
• Equipment purchase and Section 179 planning
• Retirement plan selection and contribution optimization
• Entity structure analysis (LLC vs. S corp)
• Charitable giving strategies
• Multi-year tax planning

With over 25 years serving Fremont and Bay Area taxpayers, we understand California's unique tax environment and how to optimize your total tax burden.

Conclusion

The window for 2025 tax planning is closing. Strategic decisions made before December 31 can save thousands in taxes and position your business for success in 2026.

Don't wait until you're preparing your tax return to think about deductions—by then it's too late for many strategies. Start planning now to maximize your 2025 deductions and minimize your tax liability.

Disclaimer: This article provides general information and should not be considered specific tax advice. Tax laws are complex and change frequently. Consult with FK Services or a qualified tax professional for advice tailored to your specific situation.