Updated Feb 14, 2026
Originally published Jul 30, 2019

Running a small business means juggling decisions all day, often with limited time to step back and plan. Taxes are one of the areas that tend to be addressed late, when most outcomes are already locked in.

At CMP, we see this pattern often when working with small business owners.

You may be wondering:

What is the best tax strategy for small business owners in 2026?

The best tax strategy depends on how you’re taxed and when you need deductions. There isn’t a single approach that works for every business. The right strategy changes based on your entity type, how income flows through the business, and whether your priority is lowering taxes now or managing them over time.

• Sole proprietor / single-member LLC: Tax strategies usually focus on timing income and expenses, maximizing deductible business costs, and using retirement contributions to reduce taxable income, since profits are taxed on your personal return.
• Partnership: Planning often centers on allocating income and deductions among partners, managing guaranteed payments, and coordinating tax decisions to align with each partner’s individual tax situation.
• S-Corp: The most impactful strategies tend to involve reasonable salary planning, balancing wages and distributions, and using fringe benefits and retirement plans to reduce payroll and income taxes.
• C-Corp: Tax strategy is typically driven by managing corporate-level taxes, deciding when to retain earnings versus distribute profits, and coordinating compensation and benefits to limit double taxation.

In this guide, we break down 19 practical tax strategies for small business owners that can help reduce tax liability and support better tax planning in 2026.

Reduce Tax Liability with These Tax Strategies for Small Business Owners

Here are 19 tax strategies to help you minimize your tax burden and save money at tax time.

1. Look for Ways to Reduce Your Adjusted Gross Income

If your business is a pass-through entity, you’ll report your business earnings on your personal tax return. If you pay yourself a salary, you must also report your earnings and pay taxes.

Many of your taxes are tied to your adjusted gross income (AGI), which is why it matters most on the personal side of your return and can affect phaseouts. For example, if your AGI doesn’t exceed $200,000 or $250,000 if married and filing a joint return, you won’t be required to pay the additional 0.9% in Medicare taxes.

Simple example: If you’re filing single and your AGI is $205,000, the additional 0.9% Medicare tax applies to $5,000. If you reduce your AGI by $5,000, you may avoid that additional tax.

You can lower your AGI by reducing your salary or doing one of the following things:

• Max out retirement contributions
• Contribute to a tax-deferred retirement plan
• Itemize deductions if they exceed your standard deduction
• Contribute to a health savings plan

If you want to itemize deductions, consider tracking them on a spreadsheet throughout the year. That way, you won’t need to scramble to calculate them at tax time.

2. Use Section 179 + Bonus Depreciation for Equipment and Vehicle Write-Offs

When you purchase equipment or vehicles for your business, you may be able to deduct a significant portion of the cost in the year of purchase, depending on which tax election you choose.

For 2026, the Section 179 deduction allows you to deduct up to $2,560,000 of the cost of qualifying business equipment and certain vehicles, as long as the assets are placed in service during the year. Placed in service means the equipment has been purchased, is ready, and is available for use in your business, not just ordered or paid for.

The Section 179 deduction begins to phase out once total qualifying purchases exceed $4,090,000.

If the Section 179 deduction doesn’t fully apply to your situation, you can also consider bonus depreciation. Bonus depreciation allows you to deduct a percentage of the cost of eligible new or used business equipment in the year it’s placed in service. Under current law, bonus depreciation has been phasing down, and its availability for 2026 depends on whether Congress extends or modifies existing rules.

You may also want to consider regular depreciation if your business isn’t yet turning a profit or if you expect higher income in future years. Depreciation allows you to deduct the cost of your purchase over time instead of all at once, which can be more effective if you anticipate moving into a higher tax bracket later.

Use this when:

• Use Section 179 when you want control over the deduction and have taxable income.
• Use bonus depreciation when equipment purchases exceed Section 179 limits.
• Use regular depreciation if you expect higher income later.

Other tips include:

• Deducting home office expenses based on actual costs or the IRS simplified rate of $5 per square foot, up to 300 square feet.
• If a disaster has impacted your business, you may be able to claim the loss on a prior year’s return instead of the year the disaster occurred.
• Choosing between deducting vehicle expenses based on actual costs or the IRS mileage allowance of 70 cents per mile for the 2025 tax year.
• Deducting business insurance expenses, including liability, workers’ compensation, commercial auto, and business interruption insurance.
  

The IRS scrutinizes insurance deductions closely, so it’s smart to review these with your accountant before claiming them.

3. Plan Ahead for Selling Your Business or Transferring Ownership

This matters if you may sell your business, retire, or transfer ownership within the next one to five years. Planning ahead can help reduce taxes and prevent last-minute decisions that limit your options.

As part of this process, it’s important to review your expected income and your business's structure, since the setup that works today may not be ideal when you exit. For example, in an asset sale, the buyer purchases individual assets, and the seller often pays higher taxes, whereas in a stock sale, the entity itself is transferred, potentially resulting in more favorable tax treatment for the seller.

Retirement planning also plays a role, since contributions made before a sale can reduce taxable income and improve long-term outcomes. If you already have a succession plan, now’s a good time to review it, and if you don’t, creating one can help ensure a smoother transition.

Working with a tax professional can help you evaluate your strategies and make the most of any opportunities to secure your business succession plan and wealth transfer strategies.

4. Acquire Assets at the End of the Year

In some tax years, estimating your business taxes and acquiring new or used assets before year-end can help reduce your overall tax liability. This approach works best when purchases are planned, not rushed.

Here are a few things to keep in mind:

• Timing of asset acquisition: To qualify for depreciation or expensing in the current tax year, assets must be placed in service by December 31, meaning they’re purchased, ready, and available for use, not just ordered or paid for.
• Match deductions to high-income years: If you expect higher-than-normal profits, acquiring business assets can help offset taxable income, especially if those profits push you into a higher tax bracket.
• Don’t buy equipment just for the deduction: A tax deduction only offsets part of the cost. Buying assets you don’t actually need can strain cash flow and create problems later.

Planning asset purchases with both timing and profitability in mind can help you capture deductions without making decisions that don’t serve the business.

5. Help an Employee with Student Loans

Employers can help employees repay student loans on a tax-advantaged basis under Internal Revenue Code Section 127. This provision allows you to contribute toward an employee’s student loan payments while excluding those payments from the employee’s taxable income and avoiding payroll taxes.

Originally introduced under the CARES Act, this benefit has been extended beyond 2025 and is available for 2026. Employers can contribute up to the annual Section 127 limit per employee, currently $5,250, subject to inflation adjustments. Payments made under this limit are excluded from the employee’s wages and aren’t subject to federal income or payroll taxes.

This strategy works best for businesses competing for talent with limited cash, since it provides a meaningful employee benefit without increasing taxable compensation or long-term salary commitments.

If you offer this benefit, make sure it’s structured through a compliant educational assistance program and documented properly to meet IRS requirements.

6. Use Fringe Benefits to Reduce Taxes (Instead of Raises)

When you increase wages, your payroll tax costs rise along with them. One way to manage that is to offer fringe benefits as part of total compensation rather than across-the-board raises.

Common fringe benefits to consider include:

• Medical and dental insurance
• Long-term care insurance
• Disability insurance
• Group term life insurance
• Childcare assistance
• Tuition reimbursement
• Transportation
• Employee meals
• Student loan payments (see above)

These benefits can be attractive to employees while helping you control payroll taxes, but it’s important to understand that some fringe benefits are taxable depending on how they’re structured and who they’re offered to.

You can find more information about eligible fringe benefits here.

7. Take a Tax-Free Loan from Your Business

In some cases, business owners can borrow money from their businesses, but this strategy should be handled carefully. Below-market or undocumented loans can create taxable issues, including having the IRS reclassify the loan as income or a distribution.

If you use this approach, the loan must be structured properly. The IRS publishes Applicable Federal Rates (AFRs) each month, which set the minimum interest rate required to avoid treating the loan as taxable compensation or a dividend.

To reduce risk, make sure you follow these basic rules:

• Document the loan with a written promissory note.
• Charge at least the applicable AFR in effect at the time the loan is made.
• Track and follow a repayment schedule, just as you would with a third-party lender.

AFRs change monthly, so it’s important to review the current rates and consult with your accountant before using this strategy to ensure it’s implemented correctly.

8. Don’t Ignore Carryover Deductions

You already know that some deductions have limitations. The same is true of tax credits, meaning you may not be able to use them fully in the current year. However, you may not be aware that some of these deductions allow a carryover to future years.

Carryovers can be especially helpful when deductions exceed income in a given year, allowing you to use the tax benefit later when income is higher.

Examples of carryovers include capital losses, general business credits, home office deductions, net operating losses (up to 80% of taxable income), and charitable contributions.

9. Use Accountable Plans

Do you reimburse your employees for travel and other costs? If you do, you may want to use an accountable plan. An accountable plan allows you to deduct the expenses without reporting the reimbursements as employee income. In other words, it can reduce both your employment taxes and your overall taxable income.

To qualify as an accountable plan, the reimbursements generally need to meet three requirements:

• Business connection (the expense has a valid business purpose)
• Substantiation (employees provide receipts and/or logs within a reasonable period)
• Return of excess reimbursements (any excess amount is paid back within a reasonable period)

As a bonus, using an accountable plan can also save your employees money on taxes. Under the 2018 Tax Cuts and Jobs Act (TCJA), employees can no longer deduct miscellaneous unreimbursed employee expenses.

This strategy can be especially useful for S-corp owners when the company properly reimburses legitimate business expenses, such as certain home office expenses, through an accountable plan that’s documented and consistently followed.

10. Abandon Property Instead of Reporting it as a Capital Loss

If your business owns property that has no value, you might be tempted to sell it and report it as a capital loss on your taxes. However, there are some benefits to abandoning it instead.

Abandonment of property allows you to take an ordinary loss, which is fully deductible, instead of a capital loss, which is subject to limitations. Keep in mind that a Section 1231 property may be ordinary or capital, depending on other Section 1231 losses for the year and prior losses.

11. Defer Taxable Income

If you use the cash method of accounting, you may be able to reduce your current-year tax bill by carefully timing income and expenses. This strategy works best when you expect your income to be taxed at the same or a lower rate in the following year.

Here are some common ways to defer taxable income and accelerate deductions:

• Prepay expenses (12-month rule): You can prepay certain expenses at year-end, as long as the benefit doesn’t extend beyond the earlier of 12 months after payment or the end of the next tax year. Common examples include office rent and insurance premiums.
• Bunch expenses: Grouping deductible expenses into a single year can help maximize deductions, especially if it pushes you over a threshold where the tax benefit becomes more meaningful.
• Time invoices carefully: Delaying invoices until the last few days of the year can push income into the next tax year. This requires caution. Don’t delay billing customers who typically pay slowly, or you may create cash flow issues without a real tax benefit.

These strategies shouldn’t be used blindly. Any income or expenses you defer will still need to be reported in the following year, and there’s no special filing exception for deferrals. Timing moves work best when they’re part of a broader tax plan, not last-minute decisions.

12. Hire Your Spouse or Children

If your spouse or children can legitimately contribute to your business, putting them on the payroll can be a useful tax strategy. Children may owe little or no federal income tax, depending on their earnings and overall tax situation.

To use this strategy properly, the work must be real and necessary, and the pay must be reasonable for the type of work performed. Entity type also matters, since different rules apply depending on whether you operate as a sole proprietorship, partnership, or corporation.

Money paid to your children can be used to help fund an education savings account or a Roth IRA, which can add long-term value beyond the immediate tax benefit. In some cases, payroll tax treatment may be more favorable, but this depends on the business's structure.

To reduce risk, make sure you treat family members like any other employee:

• Maintain proper payroll documentation, including pay records and tax forms.
• Create a job description and keep timesheets to show the work performed and hours worked.

Because the rules are specific and enforcement is strict, talk to your accountant before applying this strategy to your situation.

13. Evaluate Your Business Entity Type for Effective Tax Strategies for Small Business Owners

The business entity type you choose has a direct impact on your tax liability, which is why it’s an important part of effective tax strategies for business owners. Sole proprietors, partners in certain partnerships, and owners of many pass-through entities are generally subject to self-employment taxes. Depending on income levels, this can also include the additional 0.9% Medicare tax.

As profits grow, some tax strategies for LLC owners involve reevaluating the business's tax structure. In certain cases, an LLC that elects to be taxed as an S corporation may reduce self-employment taxes by splitting income between salary and distributions. However, this only works when the owner pays a reasonable salary for the work performed, which the IRS closely scrutinizes.

This isn’t a guaranteed tax savings strategy, and the benefits depend on income, compliance costs, and how the business operates. Because reorganizing an entity can have long-term tax and legal consequences, working with a tax professional to determine whether a change makes sense is essential.

14. Write Off Bad Debts

This mainly applies if you use accrual accounting.

As a business owner, you may sell products or services to customers on credit. For example, many companies invoice clients and give them 15 or 30 days to pay. When you’ve delivered goods or services, your instinct may be to continue pursuing payment, but that’s not always the most advantageous tax approach.

As the end of the tax year approaches, you should review your accounts, including past-due invoices and any loans you may have made to employees or vendors, and consider whether they should be written off as bad debt. For example, if you invoiced a client $5,000 for work that was never paid and you don’t expect to collect it, writing it off can help offset taxable income and reduce your overall tax obligation.

It’s important to note that this strategy applies to accrual-basis taxpayers only, since cash-basis taxpayers don’t report income until it’s received.

15. Choose the Right Accounting Method

As a business owner, you generally have a choice when it comes to accounting methods, and that choice can affect how and when income and expenses are taxed. The two most common options are the cash method and the accrual method.

With the cash method, you report income when you receive it and deduct expenses when you pay them. This method is available to many small businesses, but for 2026, businesses with average annual gross receipts of more than $30 million over the prior three tax years generally aren’t eligible to use it.

The other option is the accrual method, which requires you to report income when it’s earned and expenses when they’re incurred, regardless of when money changes hands. Both methods have advantages depending on cash flow, growth, and tax planning goals, so it’s important to review your situation with your accountant before making or changing an accounting method.

16. Check If You’re Eligible for Penalty Relief

Even when you’re careful, IRS penalties can still happen. This might be due to a missed filing deadline, an underpayment, or a late tax deposit, and the penalties can add up quickly.

If you’re assessed a penalty, it’s worth checking whether you qualify for penalty relief. In some cases, the IRS may remove penalties through first-time penalty abatement, which is generally available if you have a history of timely filing and payment.

Common penalties that may qualify for relief include:

• Failing to file a tax return
• Failing to pay taxes on time
• Failing to deposit payroll taxes as required

Eligibility depends on your specific situation, so it’s a good idea to check with the IRS or your accountant to see whether requesting penalty relief makes sense.

17. Don’t Miss Legitimate Business Interest Deductions

If your business has outstanding loans, the interest you pay on legitimate business debt may be deductible, thereby reducing taxable income. This typically applies to loans used for business purposes, such as equipment financing, lines of credit, or other operating expenses, as long as the interest meets IRS requirements.

It’s important to separate business and personal debt. Interest on personal expenses isn’t deductible, even if those expenses were paid with a credit card used occasionally for business. Mixing the two can lead to denied deductions and added scrutiny.

If you’re unsure whether a loan or credit card interest qualifies, IRS Publication 334 covers non-farm business interest deductions, and Publication 225 applies to farm businesses.

Reviewing these rules or confirming with your accountant can help ensure you’re not missing valid deductions or claiming ones you shouldn’t.

18. Stay Updated on the Latest Small Business Tax Law Changes

Here are the key small business tax changes to be aware of for 2026 (returns generally filed in 2027):

• Standard deduction increased (2026 tax year): The standard deduction is $32,200 for married filing jointly, $16,100 for single filers and married filing separately, and $24,150 for head of household. These amounts replace older figures and should be used for 2026 planning.
• Tax brackets adjusted for inflation: Income tax brackets and related thresholds are adjusted annually, which can affect marginal tax rates, phaseouts, and planning decisions.
• Business meal deduction remains limited: Business-related meal expenses are generally 50% deductible, and the prior-year 100% deduction is no longer available in most cases.
• Bonus depreciation rules updated: Bonus depreciation has been restored to 100% for eligible property, reversing the previously scheduled phase-down. This change significantly affects equipment and asset-purchase planning.
• Standard mileage rate increased: The business standard mileage rate for 2026 is 72.5 cents per mile, which applies to qualifying business use of a vehicle.
• Employer retirement plan credits still available: Eligible small employers can claim credits for starting a retirement plan, generally up to $5,000 per year for up to three years, and may also qualify for an additional credit if the plan includes automatic enrollment.

We update this post yearly to help keep you informed of new changes. That said, always consult with a qualified CPA.

19. Consult a Tax Advisor for Personalized Tax Strategies for Small Business Owners

One of the most effective ways to manage your taxes as a small business owner is to work with a qualified tax advisor. Even if you stay up to date on tax law changes, applying those rules correctly to your specific situation often requires professional judgment.

Business tax filings can be complex, and the penalties for mistakes or oversights can be high. Ultimately, paying for a tax advisor will be less expensive than cleaning up the aftermath of a mistake with your taxes.

Small Business Tax Planning FAQ

Here are a few questions that we often hear from clients about small business tax planning.

How Much Does a Small Business Pay in Taxes?

This is one you definitely need to consult an experienced CPA about to get concrete numbers. The short answer is that every small business is unique, but we can still give you some idea of what to expect. The Small Business Administration released figures showing an average effective tax rate of 19.8% for small businesses. The percentages can vary depending on your business structure and other factors.

If you’re a sole proprietor, partner, or owner of a pass-through entity, you may also need to account for self-employment taxes. C corporations are taxed separately at a flat 21% federal rate, unlike other business types.

Why is Tax Planning Important for Small Businesses?

Tax planning helps ensure the amount you owe isn’t a surprise. When you understand how your business is taxed, you can estimate quarterly or annual payments more accurately and avoid cash-flow issues.

It also helps you file on time, reduce the risk of penalties, and identify legitimate ways to lower your tax bill. Because business taxes can get complicated quickly, tax planning is often the most effective way to stay compliant while finding meaningful tax savings.

How Can a Retirement Plan Reduce Small Business Taxes?

A retirement plan can lower taxes by allowing you to deduct employer contributions and, in some cases, claim tax credits for starting a new plan. Higher contribution limits in 2026 mean more income can be shifted into tax-advantaged accounts.

Because the rules vary by plan type and business size, a CPA can help you choose the option that delivers the most tax savings without compliance risk.

If you’re unsure how to set up a retirement plan for your company, CMP can help with our retirement plan TPA Services.

How Do Equipment Deductions and Green Energy Tax Credits Factor into Small Business Tax Planning?

Equipment deductions can reduce taxable income by allowing businesses to write off qualifying purchases through Section 179 or bonus depreciation. With bonus depreciation restored to 100%, eligible equipment placed in service can often be fully deducted in the year of purchase.

Green energy tax credits can further reduce business taxes for investments in clean vehicles, energy-efficient equipment, or other qualifying improvements. Because eligibility and benefits vary by purchase and business type, it’s important to confirm how these incentives apply before claiming them.

Can Pass-Through Entity (PTE) Taxes Reduce Federal Taxes?

In some states, a pass-through entity (PTE) tax allows business owners to deduct certain state taxes at the business level rather than on their personal returns. This can help work around the federal cap on state and local tax deductions, potentially reducing federal taxable income.

However, PTE tax rules vary widely by state, and not every business qualifies or benefits. Because the impact depends on state law, entity type, and the owner's circumstances, this strategy should be carefully reviewed with a CPA before making an election.

What Tax Strategies Work Best for LLC Owners?

The most effective tax strategies for LLC owners often involve choosing the right tax classification, managing self-employment taxes, and carefully timing income and deductions. In some cases, an LLC may benefit from electing S-corporation tax treatment, but the savings depend on income level, reasonable salary rules, and compliance costs.

Final Thoughts on Small Business Tax Strategies

Calculating, filing, and paying your business taxes can be time-consuming and expensive. The 19 small business tax strategies we’ve covered here can help you better understand your tax obligations and reduce your tax burden as you plan for 2026.

Need help with your income tax strategy? CMP is a trusted accounting firm based in Logan, Utah, with additional locations in Layton and St George, and works with small business owners across the U.S. to develop practical, compliant tax plans tailored to their businesses. Contact us today to get started.