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Being a small business owner can be expensive. And it can be even more expensive if you end up paying more than you owe in taxes at the end of the year.
That’s why one key tax move for small businesses is to hire a trustworthy, skilled accountant to assist you with your taxes. A certified public accountant (CPA) or tax advisor can help make sure you don’t miss out on any credits and deductions you’re entitled to, and also work with you to manage your business finances throughout the year.
Below are seven smart tips for small business tax planning that can help minimize your tax liability this year — and beyond.
Key Points
• Hire a skilled accountant to ensure you don’t miss out on credits and deductions and to guide you in managing your finances effectively.
• Properly classify your business to avoid unnecessary tax payments.
• Know which expenses are deductible, such as home office, business vehicle, and travel expenses.
• Deduct interest on business loans.
• Consider setting up a retirement savings plan for your employees to lower your tax liability.
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What Are Some Business Tax Saving Tips?
Going through each of the small business tax tips below can help you avoid overpaying when it comes time to file.
1. Select the Right Business Structure
One of the most common small business mistakes is not classifying your business properly. This can lead to paying higher taxes than necessary.
Most small businesses are structured as pass-through businesses, meaning all money made flows through the owners and is then taxed as personal income. These structures include sole proprietorships, S corporations, limited liability companies, and partnerships.
C corporations’ profits, on the other hand, are subject to corporate income tax. While the corporate tax isn’t as high as it used to be (now 21%), it’s applied to all business income and then the remainder gets passed on to owners, called shareholders.
When profits are distributed to owners, they are taxed again as personal income. This “double taxation” is something you’ll want to consider when choosing your business structure.
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2. Understand Tax Obligations
Your business type determines what taxes you have to pay as well as when and how you pay them. The four general kinds of business taxes are:
• Income tax
Sole proprietors, partners, and S corporation shareholders generally have to make estimated tax payments every quarter if they expect to owe tax of $1,000 or more on their annual return. For C corporations, that figure is $500 or more.
Self-employment tax is due quarterly; some of that will be deductible on your annual Form 1040 or 1040-SR.
3. Track Income and Expenses
Careful small business accounting will help you keep track of deductible expenses and identify other potential tax deductions and credits.
The IRS suggests you track your gross income, receipts, inventory, and business expenses. You can revisit purchases, sales, payroll, and other business transactions if you keep supporting documents such as sales slips, paid bills, invoices, receipts, deposit slips, and cancelled checks. These will also be useful when you prepare income (profit and loss) statements and balance sheets.
4. Research Tax Credits
Tax credits are valuable because they reduce your tax bill dollar for dollar. In other words, a $1,000 tax credit saves you $1,000 in taxes. Since these credits tend to come and go, it’s a good idea to check which ones are currently active by checking the IRS’s business tax credits page.
Some business tax credits you may be able to take advantage of include:
• Disabled access credit: Companies that make their business more accessible to customers with disabilities may receive a tax credit for it. The credit would apply for each and every year in which they spend money on providing or improving disabled access points.
• Research and development (R&D) credit: If your company is engaged in any R&D for a new product or manufacturing process, or for improving a product’s quality, then you may qualify for this business tax credit.
• Work opportunity tax credit (WOTC): This tax credit rewards employers for hiring people who have consistently faced barriers to employment. If you employ veterans, ex-felons, or anyone that is on the IRS’s list of targeted groups, you may be able to receive a tax credit for a portion of that employee’s wages. The WOTC program is currently set to expire on December 31, 2025.
• Clean vehicle tax credit: If your business purchased a new plug-in electric vehicle or fuel cell vehicle in 2023 or after, you may qualify for a tax credit of up to $7,500.
• Empowerment zone employment credit: This credit offers a significant tax benefit to companies that hire and retain employees living within empowerment zones, or distressed areas. Eligible businesses can receive a wage credit of up to $3,000 per year for each qualified zone employee. This credit is set to expire on December 31, 2025.
5. Maximize Deductible Expenses
As a small business, many of your expenses are deductible, which means they can be used to lower your taxable income. To be deductible, however, a business expense must be both ordinary (meaning common in your industry) and necessary, according to the IRS. Here are a few you may be able to take advantage of.
• Home office deduction: If you run a small business from home, and your home office is your principal place of business, you may be able to deduct a portion of your home ownership or rental expenses. For this deduction to apply, the home office needs to be used regularly and exclusively for the business.
• Business vehicle deduction: If your car is used 100% for business, you may be able to deduct the entire cost of ownership and operation (within limits). If you use the car for both personal and business purposes, you may only deduct the cost of the share related to business use.
• Business meals: As a small business, you can deduct 50% of food and drink purchases that are related to your business for 2024. Most entertainment expenses are not deductible. However, food you supply for employee events, such as holiday parties and team-building events, are generally 100% deductible.
• Work-related travel expenses: You may be able to deduct all expenses related to business travel if the trip took you away from home and was necessary for your business. This can include airfare, hotels, rental car expenses, tips, dry cleaning, meals, and more.
• The qualified business income (QBI) deduction: The QBI deduction enables small business owners and those who are self-employed to deduct up to 20% of their qualified business income on their taxes. To qualify, your total 2025 taxable income must be $247,300 or less for single filers and $494,600 or less for joint filers.
• Education expenses: Any expenses related to professional education and training — including courses, seminars, conferences, trade publications, and books — are generally tax deductible. This may also include the cost of certifications, degrees, licenses, or other professional requirements that are necessary for operating your business.
6. Understand How Small Business Loans Are Taxed
If you’ve taken out a small business loan from a true lender (meaning not a family member or friend), then you will likely be able to deduct at least some of the interest you pay on that loan. This small business tax tip generally applies to any type of business loan on the market, including:
• Short-term loans: Because short-term loans are typically taken out and paid back within the same calendar year, deducting the interest you paid is typically straightforward. If the loan repayment bleeds into a new calendar year, then you may have to calculate how much interest was paid in one year, and how much was paid in the next.
• Personal loans: If you used a personal loan to pay for business expenses (note that not all lenders allow this), you can generally deduct all interest for the amount of the loan that was used for your company. For example, if you used half of the loan to help with your business but the other half to pay for a vacation, then you could only deduct half of the interest you paid on the personal loan. The amount you deduct must be proportional to what you used for your small business.
• Business lines of credit: A business line of credit is like a credit card in that you take out only what you need when you need it. It’s also like a credit card in that you only pay interest on the amount you use. Fortunately, the interest you pay on a business line of credit is typically tax deductible.
• Term loans: Term loans are often paid for over a number of years, so to calculate how much interest you pay in a given year, you will likely have to review your amortization schedule. The amount of interest you pay in a given year may be tax deductible.
7. Set Up a Retirement Savings Plan
Offering a retirement plan can help attract employees, while also netting some tax savings for yourself. Options for employer-sponsored retirement savings plans include SIMPLE IRAs, SEP IRAs, and 401(k)s. With any of these plans, contributions you make for yourself and your employees may be tax-deductible.
In addition, eligible small business owners may be able to claim a tax credit of up to $5,000, for three years, to help cover the costs of starting an employee retirement plan.
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Additional Small Business Tax Tips
In addition to the seven tips above, here are some more suggested small business tax strategies.
Leveraging Depreciation on Business Assets
Depreciation indicates how much of an asset’s value has been used up or exhausted during the year. Computers, office equipment, machinery, and business vehicles are examples of depreciable assets.
There are several methods for accounting for depreciation; choosing your method for maximum leverage can lead to tax savings. The default method for most assets under the tax code is Modified Accelerated Cost Recovery System (MACRS). MACRS applies different depreciation schedules for various property categories, based on the items’ useful life.
Business owners can choose other alternatives that may work better for them, such as:
• Section 179 deduction: This enables businesses to expense up to $1.22 million of the purchase price of qualifying assets immediately (as of 2024).
• Bonus depreciation: This allows businesses to deduct most of the cost of an asset in the first year, according to a set percentage and without any upper limits. Initiated in 2017, this method is phasing out by 20% annually and, unless revived, is expected to expire as of 2026.
A tax professional can help guide you in deciding which method is best for your business.
Timing Income and Expenses to Your Advantage
At the end of the tax year, you can often decide whether to accelerate your income so that it counts toward the present year, or defer it until the following year. The moves you might make would largely depend on your financial outlook.
If you expect tax rates to rise next year, you may want to pull more of your income forward into this year. This might involve issuing invoices early or requesting customers’ payments before year-end. Postponing deductible expenses until next year could also benefit you, because those deductions are more valuable when taxes are higher.
If you think tax rates will fall, it may be worth delaying some income to pay less tax on it later. You might be able to do this by waiting to issue invoices until after year-end. You may also choose to pay more of your deductible expenses in the current year, aiming to reap extra benefit from today’s higher rates.
When and Why to Work with a Tax Professional
Small business tax planning is such a complex topic that it’s challenging to keep up with all the angles and incentives while also running and promoting your company. Hiring a CPA to handle the tax planning could end up paying for itself or even saving you money.
Benefits of Hiring a Tax Advisor
Each year many business owners make mistakes, such as overpaying on their taxes. With a tax advisor, you’re likely to avoid that – or maybe even get a business tax refund.
An accountant or other tax pro could keep track of finances for your growing business. They can set up an accounting system, help you prepare financial statements, and audit your books.
Their understanding of taxes, deductions, and credits can help guide your small business tax planning so you don’t miss out on any tax breaks you’re entitled to.
They can even guide you through an IRS audit, if need be: A CPA can smooth out the audit process by providing documents and backup information to address auditor concerns.
The Takeaway
If you’re a small business owner, keep an eye out for ways to lower your tax bill. The small business tax strategies here can help you avoid overpaying. Loan interest deductions and research tax credits are two areas that present ample opportunities for saving on your tax bill.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How can I pay less taxes as a small business owner?
To reduce taxes, you’ll want to take advantage of all available deductions, including business expenses (e.g., office supplies, travel, and equipment), as well as the qualified business income deduction (or Section 199A deduction). Another way to pay less taxes is to explore business tax credits like those for hiring employees or sustainability initiatives. Contributing to retirement accounts like a SEP IRA or solo 401(k) can also help lower taxable income and thus lower your business taxes.
What are the biggest tax mistakes business owners make?
Common tax mistakes include failing to track expenses accurately, missing deadlines, and not making quarterly estimated tax payments, leading to penalties. Many business owners also neglect to separate personal and business finances, which complicates recordkeeping and tax filing. Overlooking available deductions and tax credits, such as home office expenses or depreciation, is another costly error.
How much should I save for taxes as a small business owner?
As a small business owner, it’s a good idea to set aside 30% to 40% of your net income per year to cover your quarterly federal tax installments. This estimate covers federal, state, and self-employment taxes, which include Social Security and Medicare contributions. To determine what that looks like, you’ll need to calculate your expected gross income and subtract applicable deductions. Paying quarterly estimated taxes can help you avoid underpayment penalties.
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Are home office expenses tax deductible for small businesses?
For a home office that’s your principal place of business, used regularly and exclusively for work, you may be able to deduct a portion of your home ownership or rental expenses. Using the office occasionally for other reasons may undermine your claimed deduction, though, so you’ll likely want to bear that in mind.
What tax documents are required for small business tax filing?
Before filing your small business taxes, your accountant will need basic financial statements. These typically include:
• Prior year’s business tax return with employer identification number (if you have one)
• General ledger with profit and loss statement, balance sheet, and cash flow statement
• Supporting documents such as invoices, bank statements, retirement plan contributions, and more
• Payroll records and payroll tax returns, plus copies of the W-2s and/or 1099-NECs you issued to your workers
• Loan agreements and records of payments you may have made
• Copies of estimated tax payment slips plus cancelled checks or online receipts
• Receipts for new long-term assets (with description, purchase price, date placed in service)
• Vehicle registration and mileage log if appropriate
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