Small Business Tax Planning: Top 7 Tips

Tax season isn’t anyone’s idea of a fun time. And that’s even more true for small business owners who have to worry about small business tax as well as their own.

With the economy struggling, consumer spending decreasing, and costs of living rising, the last thing any of us want to do is pay more in taxes than we need to. Higher taxes mean less profit, less financial freedom, and less opportunity.

In this article, we’ll dive into seven tax-saving tips for small businesses you can implement today to limit your tax liability tomorrow.

Table of Contents Table of Contents

1. Key Takeaways
2. 1. Ensure You're Deducting All The Right Expenses
3. 2. Fund a Retirement Plan
4. 3. Accelerate Deductions or Defer Income
5. 4. Optimize Your Business Structure
6. 5. Employ a Family Member
7. 6. Claim the Section 199A Qualified Business Income Deduction (QBID)
8. 7. Make Estimated Tax Payments
9. Conclusion
10. FAQs
11. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. 1. Ensure You're Deducting All The Right Expenses
3. 2. Fund a Retirement Plan
Show Full Guide
4. 3. Accelerate Deductions or Defer Income
5. 4. Optimize Your Business Structure
6. 5. Employ a Family Member
7. 6. Claim the Section 199A Qualified Business Income Deduction (QBID)
8. 7. Make Estimated Tax Payments
9. Conclusion
10. FAQs
11. References

1. Ensure You’re Deducting All The Right Expenses

You’d be surprised how often small business owners neglect to deduct everything they can. Some are unsure if a deduction is allowed or not, and others are worried about possibly getting in trouble with the IRS. But you’re entitled to deduct all necessary expenses incurred in running your business, so you should.

Regular Business Expenses

You should always deduct expenses directly related to your business, such as cost of goods sold (COGS), shipping, rent, equipment, utilities, office supplies, insurance, salaries, etc.

Travel Expenses

If you travel for business, you should deduct all expenses incurred during travel. These can include gasoline, parking, rideshares, public transportation, flights, lodging, checked bag fees, etc.

Vehicle Expenses

If you purchase or lease a vehicle for use in your business, make sure you’re deducting the cost of the vehicle as well as the cost to run it. Also, if the vehicle weighs 6,000 lbs or more, you can deduct the majority of the purchase price in the year you purchase it.

Tax Expenses

Make sure you record and deduct any estimated or prepaid tax payments you make during the year. It will lower your taxes when filing season comes around.

Home Office Deduction

If you use a portion of your home as a home office, be sure to deduct the portion of your rent/mortgage, utilities, and internet expenses related to it. You can calculate these amounts by dividing the square footage you use for work by the total square footage of your home. This will give you a percentage, which you can multiply by your home expenses.

For example, if your home is 1,000 square feet, and you use 150 square feet for your home office, then you’d divide 150 by 1,000, and the result is 15%. You can then multiply this percentage by home expenses. If your rent is $2,000 per month, the portion of your rent related to home office deduction would be $300 per month.

2. Fund a Retirement Plan

Funding retirement plans is a great way to increase tax deductions or defer income to later years. Business owners have several retirement plan options that non-business owners don’t. These include:

Simplified Employee Pension (SEP) IRA

A SEP IRA is a type of IRA (Individual Retirement Account) that’s easy and inexpensive to set up and administer. Business owners can take a deduction for contributions to their own SEP IRA, as well as SEP IRAs they set up for their employees. For 2023, the contribution limit was the lesser of 25% of compensation or $66,000.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

A SIMPLE IRA is a great option for small businesses with 100 employees or less. Both employers and employees can contribute to SIMPLE IRAs, and the contributions to this plan get deducted by the business and act as deferred income to the employee.

Federal law requires employers to either match up to 3% of employee’s contributions or contribute 2% of compensation into every eligible employee’s account, even if they don’t contribute themselves.

One-Participant 401(k) Plan

A one-participant 401(k) is exactly what it sounds like—a 401(k) plan set up for just one person (and their spouse, if possible). This plan is perfect for small business owners looking to defer some of their income and contribute to their retirement savings. This type of plan allows you to defer up to $69,000 for 2024 ($66,000 for 2023) if you’re over the age of 50 or up to $76,500 for 2024 ($73,500 for 2023).

3. Accelerate Deductions or Defer Income

While this tip only works a year at a time, it can still be a great way to lower your immediate tax liability. As a small business owner, you may have some control over when you pay expenses and when you receive income, which you can use to your advantage.

• Accelerate deductions: If you’re close to the end of the year, and you know you have a big purchase coming up, consider making that purchase before the end of the year. That will allow you to deduct the expense this year rather than next, which will lower your tax burden.
• Defer income: This is just like accelerating deductions, but the opposite. If it’s near the end of the year and a customer is planning to pay you for products or services, consider asking them to pay you on January 1st or later. That way, the income will be included on next year’s tax return rather than this year’s, and you can defer paying taxes on it to next year.

4. Optimize Your Business Structure

Small business owners have the power to change their business’ corporate structure if they choose to. Different corporate structures have different tax treatment rules, so it’s worth understanding each type and how it can impact your taxes.

Available business structures include:

• Sole Proprietorship
• Partnership
• Limited Liability Corporation (LLC)
• S-Corporation
• C-Corporation

Each of these business structures has its own unique federal and state tax treatment, and some are more tax-efficient than others.

Income earned by C-corporations, for example, is taxed twice: once at the corporate level, and then again when the income is distributed to shareholders.

5. Employ a Family Member

As unusual as it might sound, you can employ family members in your small business. This allows you to increase your salary expense, lower your business’s taxable income, and still keep the money in the family.

You can also contribute to their retirement accounts (mentioned above) through the business rather than contributing your own personal funds, which lowers taxable income even further.

Now let’s address the elephant in the room: yes, you can even hire your own children. While children can’t work for strangers, they can work for the family business, and you can pay them a fair wage and even contribute to a retirement account for them.

6. Claim the Section 199A Qualified Business Income Deduction (QBID)

The Section 199A deduction was introduced by President Trump in the 2017 Tax Cuts and Jobs Act, and it allows taxpayers to take a deduction equal to 20% of their qualified business income. To qualify for this deduction, the income must flow from a sole proprietorship, partnership, or S-corp tax return into an individual income tax return.

Section 199A represents a significant deduction for small business owners, so anyone who owns a business and receives income should seek to utilize it. The deduction is currently available through 2025, but it may be extended.

The income limits are $191,950 for single taxpayers, $383,900 for those filing jointly for 2024, and $182,100 and $364,200, respectively, for 2023.

7. Make Estimated Tax Payments

This might be the least attractive tip on this list, but it’s important: make sure you pay any estimated taxes due on time. The IRS and state tax authorities usually require estimated tax payments to be made quarterly. Neglecting to pay estimated taxes on time could result in owing interest and penalties, which is never fun.

Conclusion

While tax season might not sound enjoyable, especially as a small business owner, there are several strategies you can use to plan for tax season and lower your tax burden.

If you’re unsure of how to get started implementing these strategies, using dedicated accounting software for small businesses can be extremely helpful.

The tax-saving tips for small businesses discussed in this article are designed to help you develop a thoughtful tax strategy, master tax season, and reduce your tax burden as much as possible.

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David Kindness

Editor

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David Kindness

Editor

David is a CPA and nationally-recognized financial writer and editor, specialising in taxes, business accounting, and corporate finance. He has 4+ years experience writing and editing thousands of articles for millions of monthly readers, and has contributed to the likes of Investopedia, The Balance, OnPay, and now Techopedia. Prior to launching his writing career, he spent several years working as a CPA, tax accountant, and senior financial accountant.

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