Our list of tax saving tips for small business owners will help you keep your tax bill down. There are many ways to minimize income taxes, such as investing in clean energy, contributing to a retirement plan, identifying unused deductions, converting your sole proprietorship into an S corporation (S-corp), and making estimated tax payments.
1. Invest in Clean Energy
Your small business may be looking to save taxes and support environmentally-friendly initiatives. Here are two of the primary ways green initiatives can help you save taxes.
1. Credit for Qualified Commercial Clean Vehicles: Buyers of qualified vehicles may be eligible for a credit of up to $40,000 through the Commercial Clean Vehicle Credit put in place through IRS Code Section 45W. Qualified vehicles include buses, ambulances, passenger vehicles, and specific kinds of mobile machinery that plug in and meet certain battery requirements. The maximum amount of the credit for vehicles weighing under 14,000 pounds is $7,500.
2. Energy Efficient Commercial Buildings Deduction: Taxpayers who make energy-efficient improvements to lighting, cooling, heating, or hot water systems in their commercial buildings may claim the applicable deduction on IRS Form 7205.
- Buildings placed in service in 2024 are eligible for a maximum deduction of $5.65 per square foot.
- The maximum deduction for 2025 is $5.81. This amount is adjusted annually for inflation.
2. Pay Wages to Your Children
Your children likely have a much lower marginal tax rate than you do, so paying your kids from your business can save taxes. Give them roles in your business for which they are paid a reasonable amount, which can be done by identifying what you would pay someone unrelated to perform the same task. The wages paid to them save tax on your personal return at your high marginal tax rate, while they pay tax at their low (often zero) marginal tax rate.
How Paying Your Child Saves Taxes
Sole proprietors and partnerships, where the only partners are the parents of the child, don’t have to pay Social Security and Medicare taxes on wages paid to their child under 18 years old. However, you do need to withhold federal and state income tax, just as you would for other employees.
3. Rent Property to Spouse for Self-employment Tax Benefit
Strategic use of rental property can help taxpayers reduce self-employment tax. Based on legal precedent, property owned by one spouse (not jointly owned) and rented to the other may be eligible for a full Schedule C deduction and full recognition of income on Schedule E.
Let’s look at how this would work in practice.
Scenario:
- Christopher Carpenter needs office space to conduct his architectural business, which is organized as a sole proprietorship under the name Carpenter Enterprises.
- Christopher and his wife Cathy own a building and decide to rent it to Carpenter Enterprises for $20,000 per year.
- Cathy does not participate in the operations of Carpenter Enterprises.
Since the property is jointly owned, Christopher is only permitted to take a deduction for $10,000 in rent paid on his Schedule C for Carpenter Enterprises—and only $10,000 of income will be picked up on Cathy’s Schedule E as rental income, representing Cathy’s half of the rent. If Cathy was the sole owner of the property, Christopher could deduct the entire amount on Schedule C and Cathy would recognize the full amount on Schedule E.
Why this strategy works: Schedule C income is subject to both self-employment tax and income tax. However, Schedule E income is subject to income tax and not self-employment tax. While the $10,000 deduction and income in our example are a wash for income taxes, they reduce income subject to self-employment tax by $10,000.
4. Claim the 199A Qualified Business Income Deduction
For tax years 2018 through 2025, taxpayers can reduce their taxable income through the qualified business income deduction (QBID), which is equal to 20% of income flowing through to their personal returns from a sole proprietorship, partnership, or S-corp.
There are several limitations to the income deduction, but the limitations don’t apply to joint taxpayers with a total taxable income of less than $394,600 for 2025 and $383,900 for 2024. Even if your taxable income exceeds these thresholds, you likely qualify for some deduction, but the calculations become more complicated. For more information on how this deduction applies, please see our article on what is the 20% pass through deduction (qbid) & who qualifies.
Section 199A Income Thresholds | ||
|---|---|---|
2025 | 2024 | |
Married Filing Joint (MFJ) | $394,600 | $383,900 |
Married Filing Separate (MFS) | $197,300 | $191,950 |
Single | $197,300 | $191,950 |
Head of Household (HOH) | $197,300 | $191,950 |
5. Claim the Self-employed Health Insurance Deduction
You may be able to deduct 100% of the premiums paid during the year for qualifying health insurance for yourself, your spouse, and any dependent child under age 27 at the end of the year. Qualifying health insurance includes medical insurance, qualifying long-term care coverage, and all Medicare premiums.
6. Contribute to a Retirement Plan
As a self-employed individual, you’re eligible to contribute to a Keogh plan (also known as an HR 10 plan). How much you can put into your plan depends in part on the type of plan you have.
Generally, there is a limit to how much of your yearly salary you can count toward your retirement plan contributions. This amount changes every year.
- 2024: $345,000
- 2023: $330,000
- 2022: $305,000
- 2021: $290,000
- 2020: $285,000
You can deduct your plan contributions on Form 1040 if you make any contributions during the year.
7. Invest in a Business Building
Business buildings are a great tax shelter because you can deduct the expense of the building while the value of the building increases. I call this a “phantom expense”—you’re deducting depreciation related to the building that doesn’t exist, thus lowering taxable income. As discussed more in tip 12, if your business is an S-corp, you’ll want to own the building personally and lease it to your business.
Depreciation as a Tax Shield
When you purchase a warehouse, an office building, or a residential rental property, you may consider performing a cost segregation analysis. Cost segregation analyses are detailed studies of how much building parts and fixtures cost. They are usually done by a trained professional, like an engineer, appraiser, or contractor.
During the study, the parts of the building that make it up will be looked at and given a depreciable life of five, seven, or fifteen years. This can be a great way to save money on taxes, take advantage of the extra depreciation deduction, and get more cash.
By separating the cost of MACRS property with a shorter life span than the cost of the building, you can claim extra depreciation on the individual parts of the property. So, any equipment, furniture, or fixtures on the property—like a heating, ventilation, and air conditioning (HVAC) system—will be qualified for bonus depreciation.
8. Deduct Fixed Assets Using Bonus Depreciation or Section 179
Bonus depreciation and section 179 expense are both rules that allow you to currently deduct the entire cost of fixed asset purchases, instead of depreciating them over a period of years. Before 2023, bonus depreciation was allowed on 100% of the cost of qualifying purchases, making section 179 mostly unnecessary.
Bonus depreciation is limited to 60% of the cost of qualifying assets in 2024 and 40% in 2025. So, you can maximize your deduction by first claiming the maximum section 179 and then claiming bonus depreciation on the remaining costs.
9. Screen Job Candidates for the Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is available to business owners who hire and pay workers with certification from a state workforce agency as members of one of the 10 identified targeted groups listed below:
- Veterans
- Ex-felons
- IV-A recipients
- Designated community residents
- Vocational rehabilitation referrals
- Summer youth employees
- Supplemental Nutrition Assistance Program (SNAP) benefits recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Long-term unemployment recipient
The credit is worth 40% of the qualified first-year pay of workers who worked at least 400 hours. For employees who worked at least 120 hours but less than 400 hours in their first year, the credit is lowered to 25% of their qualified first-year wages. Most businesses can get about $2,400 in WOTC.
To take advantage of this money-saving tax credit, you’ll need to complete IRS Form 8850 before you make an offer to your potential employee.
10. Claim the Deduction on Home Office Expenses
Many small business owners can deduct the cost of operating a qualified home office. With the home office deduction, you can write off some of the costs of owning your home when you do your taxes.
The business part of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs are all business costs that can be deducted. If you don’t want to track actual expenses, you can deduct a standard rate of $5 per square foot for a maximum of 300 square feet.
11. Deduct Your Mileage Expenses
Deducting mileage is an easy decision if you regularly drive your personal vehicle for business purposes. At 67 cents per mile driven in 2024 (70 cents per mile in 2025), the standard mileage rate can very quickly add up to a big tax deduction. You may also find that deducting actual expenses may be more beneficial than deducting standard mileage. No matter which method you choose, note that commuting to and from your business location isn’t deductible as a business trip.
In the old days, taxpayers tried to keep manual mileage logs and it was a pretty big hassle. But now, there are many great mileage tracking apps that will run in the background of your phone and automatically record the start and stop of each trip. At the end of the day, you just swipe left or right to separate business from personal trips.
12. Convert Your Sole Proprietorship to an S-corp
The primary tax advantage of converting your sole proprietorship to an S-corp is payroll tax savings.
- In a sole proprietorship, all of the business income is subject to both self-employment tax (the equivalent of payroll taxes paid by employees) and income taxes.
- With an S-corp, only W-2 wages and salary paid to the owner are subject to payroll taxes. The business income remaining after owner compensation is subject to income taxes but not payroll taxes.
The timing of the S-corp conversion is important. A good rule of thumb is to make the conversion when you hire employees. Prior to having employees, it’s hard to argue that income from the business is attributable to anything other than the owner’s labor. Therefore, the IRS could argue that all the income of the S-corp should be paid in wages, and you won’t save any payroll taxes.
Wages paid are taxable for payroll tax purposes, but other business payments—such as interest, rent, and shareholder distributions—aren’t. Therefore, you can save payroll taxes by withdrawing money as rent, interest, and shareholder distributions instead of wages.
1. Minimize Your Compensation as an S-corp shareholder
As a shareholder/employee, your compensation must be paid through the payroll system and have payroll taxes withheld from it. The way to save payroll taxes is to minimize your compensation while finding other ways to withdraw the cash you need.
However—and this is extremely important—you must pay yourself a reasonable salary as an S-corp shareholder for the business services you perform. You can’t intentionally underpay yourself.
2. Loan Your S-corp Money
If your business needs an infusion of cash, consider loaning your business money instead of investing it as equity capital. The corporation will then repay the loan to you plus interest at a reasonable rate.
The interest is tax-deductible by the corporation and taxable to you, so you don’t save income tax—but you do withdraw the interest without paying payroll taxes. Ensure your loan is documented with a promissory note that has a reasonable interest rate.
3. Lease Real Property to Your S-corp
A good general rule to follow is to not own real estate inside a corporation. Instead, own the real estate personally, or in a single-member LLC if you’re concerned about liability protection. Then, rent the real estate to your S-corp at a profit. Then, you’re able to withdraw the rent from your corporation without paying payroll taxes. As with all these strategies, see to it that the dollar amounts of any contracts are reasonable.
4. Take a Shareholder Distribution From Your S-corp
The simplest way to take money out of your S-corp without paying payroll tax is to take a shareholder distribution. It’s neither deductible by the S-corp nor taxable to you, so it has no income tax consequences. However, excessive shareholder distributions could cause the IRS to question whether your compensation is high enough given the company’s success.
Various Types of S-Corp Shareholder Payments
Another problem with taking a shareholder distribution (and the reason you need tips 2 and 3) is that if the company is struggling, a shareholder distribution may not be reasonable. However, if the company has a signed promissory note (tip 2) or lease (tip 3) with you, then they’re justified in making payments to you regardless of how they’re performing. This ensures your payments from the S-corp will continue to be reasonable and can be counted on to pay your living expenses.
13. Use the Tax-loss Harvesting Strategy
Tax-loss harvesting is selling your investments that have an unrealized loss. By selling investments that have declined in value, you recognize a capital loss that can be used to offset capital gains for the year plus $3,000 of other types of income, like wages, dividends, and interest.
One limitation to this strategy is the wash sale rules, which disallow your capital loss if you purchase a substantially identical asset within 30 days before or after your sale at a loss. In other words, you can’t recognize a loss on the sale of Company A stock and then immediately repurchase it.
14. Make Estimated Tax Payments
Small business owners are required to make estimated tax payments on their business income.
- S-corp owners must estimate the amount of income tax on their business income and submit the payments in four quarterly installments.
- Sole proprietors and partners must estimate the amount of both self-employment tax and income tax on their business income.
- Self-employment tax is 15.3% and is in addition to income tax, which could be as high as 37% in 2025. Needless to say, sole proprietors need to stay on top of their estimated payments or they could fall far behind very quickly.
Generally, estimated tax payments are only necessary when you have income that isn’t subject to withholding, such as business income. However, the amount of the payments is determined by estimating the total tax on your tax return and subtracting any projected withholding. You can head over to the IRS’s page on estimated taxes for more information.
15. Use W-2 Withholding to Avoid Underpayment Penalties
Many small business owners also have a 9-5 job. Withholding from this job’s pay can come in handy when tax planning for estimates. The IRS expects individual estimated taxes to be paid as the income is earned and remitted in quarterly installments, which can be somewhat complicated in situations where unexpected income is incurred toward the end of the year.
Income taxes from W-2 compensation are treated as paid evenly throughout the year, irrespective of when it is actually withheld during the year. This allows taxpayers to increase withholding at year-end to accommodate for unexpected income received late in the year.
For example, a taxpayer who receives both self-employment income and W-2 compensation may elect to have a year-end employee bonus withheld and remitted to the IRS for taxes to supplement additional income received from their side business.
Frequently Asked Questions (FAQs)
The best way to minimize taxes as a small business owner is to maximize deductions. The best way to know which deductions apply is to keep good records.
LLC owners may want to consider converting to an S-corp to eliminate self-employment taxes, as LLC earnings are subject to both self-employment and income taxes.
The amount of taxes you should set aside depends on your income for the year. You may be able to avoid federal underpayment penalties if you pay at least 100% of the prior year’s tax (110% if your income is over $150,000). Some tax practitioners recommend putting aside 25% to 40% of income for your tax bill (including any W-2 withholding you may have).
Bottom Line
I hope that our tax tips for small business owners have helped you. Good tax planning and saving on your taxes starts with being organized and having a solid bookkeeping system to produce accurate financial statements. Once you’re organized, consider hiring a tax pro to help you sort through the myriad of tax deductions that might be available to your business.
