5 Tax Planning Strategies for Small Business Owners
1. Choosing the Right Business Structure Can Lower Your Tax Bill
Your entity type directly affects how you’re taxed—and choosing the right structure can lead to significant savings. Many small businesses start as sole proprietorships or LLCs by default, but that setup might cost you more in self-employment taxes over time. If your business is consistently profitable, electing to be taxed as an S corporation can allow you to pay yourself a reasonable salary while taking the rest as distributions, which aren’t subject to self-employment tax.
That move isn’t right for everyone—it comes with stricter payroll and bookkeeping requirements—but it can make a real difference. If you’re earning $100,000 or more in net profit, talk with your accountant about whether an S corp election makes sense. The IRS allows you to make that election using Form 2553, and timing matters, so don’t wait until year-end.
2. Use Section 179 and Bonus Depreciation to Write Off Major Purchases
If you’re investing in equipment, software, or business vehicles, don’t miss out on accelerated deductions. Section 179 allows you to deduct the full cost of qualifying equipment in the year you place it into service, rather than depreciating it over several years. For 2025, the limit is $1,160,000, with the deduction starting to phase out after $2.89 million in total purchases. That’s a strong incentive to upgrade your office tech or tools if you’ve been holding off.
Bonus depreciation is also still in play for this tax year, though it's gradually being phased out under current law. For assets placed in service in 2025, you can still write off 60% of the cost immediately. This applies even if your purchase exceeds the Section 179 limit or if your business isn’t yet profitable enough to use the full deduction under Section 179. Together, these two tools let you invest confidently and reduce your taxable income at the same time.
3. Maximize Retirement Contributions to Reduce Taxable Income
Retirement planning is one of the most underused tax strategies for business owners. Setting up a Solo 401(k), SEP IRA, or SIMPLE IRA not only helps you build long-term financial security, it also creates opportunities for immediate tax savings. Contributions to these accounts are deductible and reduce your taxable income for the year.
A Solo 401(k) is especially flexible. If you’re self-employed with no full-time employees other than your spouse, you can contribute up to $23,000 as an employee in 2025, plus 25% of your business profits as the employer—up to a combined limit of $69,000. If you’re over 50, an extra $7,500 catch-up contribution is allowed. This strategy can easily wipe tens of thousands off your tax bill while preparing you for retirement, and the account setup is straightforward with most major financial firms.
4. Stay Ahead with Quarterly Estimated Tax Payments
The IRS expects you to pay taxes as you earn income. If you don’t have taxes withheld through payroll or another source, you’re required to make estimated payments throughout the year. Missing these deadlines can trigger penalties and interest charges, even if you pay everything by April 15.
Use your previous year’s tax liability or projected income to calculate quarterly estimates. Payments are typically due in April, June, September, and January. If your income varies from quarter to quarter, you can use the annualized income method to reduce each payment proportionally. Tools like IRS Form 1040-ES and business accounting software can help you calculate amounts and keep records. Consistent estimated payments protect your cash flow and keep your tax burden manageable.
5. Track Every Deductible Business Expense—No Matter How Small
The easiest money to save on taxes is the money you’re already spending—if you document it properly. Every legitimate business expense can reduce your taxable income. This includes office supplies, internet bills, marketing costs, software subscriptions, legal fees, and business travel. Even smaller purchases like coffee for meetings or mileage for client visits add up.
Use an accounting platform that integrates with your bank and credit card accounts so you can categorize expenses in real-time. Keep digital receipts or scan paper ones. The IRS doesn’t require receipts for expenses under $75, but having them on file strengthens your audit protection. If you're working from home, don’t forget the home office deduction—calculated either as a flat $5 per square foot (up to 300 sq. ft.) or by actual expenses. Just make sure the space is exclusively used for business.
Top Tax Planning Strategies for Small Business Owners
- Elect the right business entity
- Use Section 179 and bonus depreciation
- Contribute to a retirement plan
- Make quarterly estimated payments
- Track and categorize all deductions
In Conclusion
Tax planning isn’t a once-a-year event—it’s something you build into how you run your business every day. By picking the right structure, leveraging deductions, saving for retirement, staying compliant with quarterly payments, and keeping excellent records, you’ll avoid surprises and keep more of your profits. These strategies don’t require complex maneuvers—they just require consistency, good documentation, and a proactive approach. The earlier you start planning, the easier it becomes to manage your tax liability and grow your business with confidence.
Explore more strategies for lowering tax liability and boosting profitability with Brian C. Jensen.
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