8 tax tips for small business owners

Small business owners are often looking for ways to minimize their company’s tax liability. That may mean evaluating the company’s current financial performance and adjusting its tax strategy accordingly, taking advantage of favorable tax pass-through provisions or setting up a retirement plan for its owners and their employees.

Whatever the situation, year-end tax decisions could have a significant impact on a business’s tax picture now and for years to come. While working with a tax advisor, business owners should consider whether the eight strategies below could help.

1. If it’s been a strong year, consider deferring revenue recognition and accelerating expenses

If a company operates on a cash basis for tax purposes and

• The business has had an especially strong year and profits are expected to be high this year, consider whether deferring revenue recognition to the following year is an option (depending on when cash payments are received), and increase this year’s expenses by paying some of the following year’s costs in advance, subject to certain limitations, advises accountant Vinay Navani of WilkinGuttenplan, an accounting and advisory firm.
• Profits seem likely to be lower this year, consider accelerating cash collection before December 31, if possible, and delaying paying expenses until after the following year, if feasible. Income realized this year may be taxed at a lower marginal income tax rate - and deductions may be more valuable if income is higher in the new year. “If a net operating loss is expected this year, keep in mind that carrying that loss forward to offset certain income in future years, subject to limitations, and potentially lower taxes, may be an option” Navani suggests.

For the 2025 tax year, there may be other reasons for accelerating income, Navani notes. With the lower marginal tax rates under the Tax Cuts and Jobs Act of 2017 scheduled to expire after December 31, 2025, barring action by Congress, the top marginal individual income tax rate will jump from 37% to 39.6% beginning January 1, 2026, Navani notes. “Sole proprietors, partnerships or S corporations, may want to start thinking ahead about ways to accelerate income in 2025 – in the event that the higher rate kicks in the following year.”

2. Making gifts to family

“For many business owners, the business is not just their largest asset, it’s the one that’s growing fastest in value each year,” Navani says. With the upcoming expiration of the current high gift and estate tax exemptions under the Tax Cuts and Jobs Act of 2017 such exemptions are set to drop after December 31, 2025 to the 2017 base level of $5 million for individuals, $10 million for couples (indexed for inflation). Business owners may want to start evaluating how to transfer some of that wealth to beneficiaries before the expiration of the higher exemptions. “These are time-consuming decisions,” Navani says. “Waiting until the second half of 2025 may not give enough time, and estate lawyers and CPAs will likely be inundated with requests for help.” Depending on the age of the children in the family, the vision for the business and other factors, business owners have plenty of options, Navani adds. For example, gifting non-voting shares to younger beneficiaries could move assets out of the estate now, without giving children management authority before they’re ready. Yet enacting such decisions takes time, he cautions. So speaking with a tax advisor soon about which approaches might make sense for a business and family is recommended.

3. Understand the tax implications of remote-working employees

Offering remote work as an option may help business owners retain key employees and cast a wider net for talented new ones. Yet owners need to be aware of and plan for tax consequences, Navani cautions. “Make sure the business is compliant with all the payroll tax and state filing obligations,” he suggests, even if relocating within the United States. If relocating to another country, the situation may become more complex. “For example, if an employee relocates from New Jersey to India, the employer needs to understand the Indian rules and responsibilities imposed on the employer,” he says. A tax advisor should be consulted with respect to each jurisdiction’s obligations.

4. Determine whether the business may qualify for different tax treatment

Many small business owners can deduct 20% of qualified business income in calculating their federal income taxes — “but it’s not automatic, and requires some planning” Navani says. Similar to other provisions that were promulgated under the Tax Cuts and Jobs Act of 2017, the 20% deduction is set to expire after December 31, 2025. The deduction generally applies to income from “pass-throughs” (when owners file tax returns and pay income taxes on business income themselves, rather than the business itself filing tax returns and paying income tax on business income themselves). However, certain service businesses, such as legal, medical or accounting practices generally may not take advantage of such deductions. A tax specialist can help explain which tax laws and deductions apply to a business.

5. Create a smart plan for paying taxes

The sooner business owners have an idea of the business’s general outlook for the tax year, the better prepared they are to prevent cash flow disruptions — either by putting money aside or arranging for a line of credit to pay the IRS. “Many businesses have faced higher costs due to inflation,” Navani says. “Thinking ahead about what they’ll owe next April could prevent them from facing liquidity problems at tax time.”

One possibility to consider if the qualifications are met: estimated taxes can often be based on the prior year, so if the business had a down year, paying a relatively low amount of estimated tax for this year to preserve cash flow is an option. Make sure to pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller, to avoid any penalties. If the business owner’s adjusted gross income for the previous year was $150,000, or $75,000 if married filing separately, it’s 110% of the tax shown on the prior year’s return, not 100%. “Keep in mind that this rule applies to individual taxpayers and thus owners of pass-through entities (PTE),” Navani notes. “C corporations have different rules to calculate estimated taxes.” Of course, the full remaining amount would be due by the IRS tax deadline in 2025. Business owners should work with an accountant to estimate the tax due, so they can invest the difference and be potentially better prepared for the eventual payment.

6. See whether pass-through entity status could help reduce taxes

Many states have enacted PTE taxes as an IRS-approved work-around to the $10,000 limitation on state and local tax deductions as part of the Tax Cuts and Jobs Act of 2017.¹ Generally, a qualified PTE entity, such as an S corporation, partnership, or an LLC taxed as either of the two, can make an election to pay a PTE tax at the entity level on behalf of the owner’s/partner’s share of their qualified net income from the entity.

If the election is made and the PTE tax is paid, this will generate a tax deduction on the entity’s federal return, thereby reducing the taxable income reported on the owners/partners federal Schedule K-1. Here’s an example of how it can work: If an S corporation has $1 million worth of income and the ultimate state tax is $60,000, that amount is deemed an expense, so that the S corporation’s income for federal tax purposes becomes $940,000. Thus, the business owners are able to receive a tax deduction and ultimately pay less federal taxes due to taxes being assessed against a lower amount, thanks to the PTE benefit. Additionally, the PTE paid will generate a tax credit to owners/partners that elect to participate in the PTE election and thus are neutral with respect to state taxes. “Since 2017, more and more states have adopted these provisions,” Navani says. “If the business is an S corporation or LLC, be sure to speak with a tax professional about the state’s policies.”²

7. Set up — or add to — a retirement savings plan

“Attracting workers continues to be a problem for small business owners,” Navani says. “A retirement plan could help make a company more attractive to employees while enabling the owner to save money.” Small business owners generally have several options for employer-sponsored retirement savings plans, including SIMPLE IRA, SEP IRA, 401(k) and profit-sharing plans. The plans differ in eligibility requirements, amount the employer and employee can contribute, the investment options available, and the ease and expense of setting them up, among other factors. Small business owners may also set up personal IRAs for themselves.

With any plan, contributions the business owners make to themselves and their employees may be tax-deductible. Small businesses may also get a tax credit to help defray the cost of starting certain retirement plans. For calendar year taxpayers, they are generally given until the due date, including extensions, of the small business’s tax return to contribute funds to a retirement plan. But some types of plans must be established before the end of the tax year, or earlier during the tax year, to get the tax deduction. It’s recommended to ask a tax advisor. To learn how much one can contribute to a retirement plan, refer to our annual contribution limits guide.

8. Consider equipment deductions and green energy tax credits

Buying new or used equipment for a company and placing it in service before December 31, 2024, may entitle a business to elect to expense the purchase and claim a federal income tax deduction for the 2024 tax year, under IRC Section 179.³ As the law currently stands, the benefit still exists for future years, adjusted for inflation. The aggregate cost of property that a taxpayer elects to treat as an expense cannot exceed $1,220,000. Because the deduction is applicable to small businesses, it starts to phase out at spending amounts greater than $3.05 million. When planning an equipment purchase, consider your timing carefully, Navani advises. “If it’s been a challenging year financially and better results are envisioned in the year to come, consider holding off that purchase until the start of the tax year, giving the business a potential deduction for the next tax year, when the tax bill could be higher.”

If the Section 179 limits described above have been reached, other incentives could be claimed favoring investing in new equipment now, he adds. Bonus depreciation, set at 100% in 2020 during the pandemic, stands at 60% of the cost basis for property placed in service in 2024. “So, if debating whether to buy a new piece of equipment, it could make sense to buy it now and get it set up and running before the end of the year in order to get that 60%.”

Now may also be a time to consider green improvements for the business. The federal Inflation Reduction Act, signed into law in August 2022, includes nearly $400 billion for clean energy tax credits and other provisions aimed at combating climate change by incentivizing investment in clean energy technologies. These include federal income tax credits for buying new or used electric or hybrid clean vehicles, installing residential clean energy property, and other investment activities. Restrictions apply, so check with a tax advisor on which credits might be available to you. Also check whether your state offers any clean energy incentives, Navani suggests.

¹ See IRS Notice 2020-75 (noting that proposed regulations are forthcoming with respect to tax benefits under state PTE provisions).

² PTE provisions vary from state to state. Consult your tax advisor regarding the specific laws and related rules.

³ See IRS Publication 946, How to Depreciate Property.