19 Small Business Tax Planning Strategies to Slash Your Tax Bill [2025]

This post was originally published on February 24, 2022, and extensively updated on Feb 7, 2025.

As a business owner, managing seemingly endless obligations is just another day. One moment, you may be handling a human resources issue, and the next, you may be coping with a customer complaint. Wearing many hats can make it difficult to stay on top of other aspects of running a business, such as taxes.

At CMP, we’re familiar with the tax challenges that small businesses face. One of the most frequently asked questions we hear from our business clients is this:

What’s the best small business tax planning strategy?

A tax strategy is essential because it governs everything you do and provides a framework that allows you to fulfill your tax obligations without overpaying. This post will review some business tax basics and reveal 19 of the best small business tax planning strategies for business owners.

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

• Contributing to a tax-deferred retirement plan
• Itemizing deductions if they exceed your standard deduction
• Contributing 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. Be Strategic with Your Tax Elections

While the 2018 Tax Cuts and Jobs Act (TCJA) allowed for significant deductions on equipment purchases, the rules have evolved for 2025. Now, you can take advantage of the Section 179 Deduction to deduct up to $1,250,000 of the cost of qualifying business equipment or machinery purchased or financed during the year. However, this deduction comes with a phase-out threshold of $3,130,000.

If the Section 179 deduction doesn’t fully apply to your situation, you can also consider Bonus Depreciation. Under Bonus Depreciation, you can deduct a percentage of the cost of eligible new or used business equipment in the year it is purchased. However, the rate is phasing down:

• For 2023: 80%
• For 2024: 60%
• For 2025: 40%

However, you may want to consider depreciation as an alternative for new businesses or those that aren’t yet turning a profit. Depreciation allows you to deduct the value of your purchase in future tax years instead of all at once. That’s beneficial if you expect your profits to increase and push you into a higher tax bracket.

Other tips include:

• Deducting home office expenses based on actual costs or the IRS simplified rate, which is $5 per square foot up to 300 square feet of space.
• If a disaster has impacted your business, you can claim the losses on your prior year’s returns instead of the year when the disaster occurred.
•  You can choose between deducting vehicle expenses based on the actual cost or the IRS mileage allowance of 70 cents per mile for the 2025 tax year.
• Deduct business insurance expenses, including liability, workers’ compensation, commercial auto, and business interruption services insurance.

The IRS scrutinizes insurance deductions closely, so ask your accountant before taking deductions.

3. Rethink Your Exit Planning Strategy and Wealth Transfer Strategies

In 2025, it's important to review your exit planning and wealth transfer strategies, especially in light of changing economic conditions. Here are some steps you can take to minimize your tax burden and protect your business:

• Review Your Estimated Net Income: If your income is lower than expected, you may want to explore tax credits and other benefits that could be available at a lower income level. On the other hand, if your income is higher than anticipated, consider increasing your deductions, such as making charitable contributions or using other strategies to reduce your taxable income.
• Reassess Your Business Entity: As your business income increases, it may be time to reconsider your business structure for tax purposes. If you're a sole proprietor, you may want to incorporate as an LLC, and some LLCs may benefit from electing to be taxed as an S Corporation to reduce their tax burden.
• Optimize Your Retirement Plan: Offering a retirement plan to your employees can help you save money on taxes. Contributions to retirement plans, including 401(k)s and other qualified plans, can lower your taxable income. Additionally, consider increasing your contributions to your own retirement accounts, especially if you anticipate higher earnings in 2025.
• Evaluate Your Business Succession Plan: If you have a business succession plan, now is a good time to review it and make adjustments as necessary. If you don't have one, it's crucial to create one to ensure a smooth transition of ownership when you're ready to pass the reins to your heirs or successors.

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 and used assets to reduce your taxes may be beneficial.

The Tax Cuts and Jobs Act of 2018 allows 80% bonus depreciation for business assets acquired in 2023. The bonus depreciation percentage drops to  40% for 2025.

 If you acquired assets before 2023, you may still be eligible for 100% bonus depreciation under the rules that applied from 2018–2022, but this no longer applies to assets acquired in 2023 and beyond. This earlier rule may only be relevant for a few taxpayers, so be sure to check if your assets qualify.

Here are a few tips:

• Timing of Asset Acquisition: Make sure that the assets are placed in service before the end of the year to qualify for the depreciation deduction in the current tax year.
• High Profits? If you expect high profits in 2025, acquiring business assets and utilizing bonus depreciation can help offset some of the tax burden, especially if your income is expected to push you into a higher tax bracket.

Keep in mind that the bonus depreciation percentage will continue to phase down, so planning your asset purchases accordingly can help maximize deductions.

5. Help an Employee with Student Loans

The CARES Act, signed into law in 2020, included a provision allowing employers to assist employees with student loans. If an employer repaid part of an employee’s student loans, the employee had to pay taxes because the payments were seen as income.

The CARES Act included an exception allowing employers to get a payroll tax exemption to repay employees’ student loans. The repayments are excluded from employees’ income, meaning that they don’t have to pay taxes.

This provision will remain in effect through 2025 and allows employers to earn some goodwill with employees while saving money on payroll taxes.

6. Establish Fringe Benefit Plans for Employees

When wages are increased, employment tax costs rise. One way to avoid this is to offer fringe benefits as part of total compensation.

Some of the tax-exempt benefits you may want to consider include the following:

• 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)

You can find more information about eligible fringe benefits here.

7. Take a Tax-Free Loan from Your Business

Many business owners don’t know they can take out a low—or no-interest loan from their business. To ensure compliance, review the Applicable Federal Rates set by the IRS.

You can check out the current IRS set rates here. They update monthly; you should ask your accountant before implementing this strategy.

8. Don’t Ignore Carryover Deductions

You already know that some deductions have limitations. The same is true of tax credits, meaning you may need help 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.

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.

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.

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

Are you using the cash method of accounting for your business? If you are, you can take advantage of that by carefully managing your business taxable income to minimize your taxes. If you anticipate that your business income will be taxed at the same (or lower) rate in 2025, here are a few tips to help you defer some of your income:

• Put recurring expenses on your credit card. You can deduct them in the current year even though you won’t pay the credit card bill until next year.
• Mail checks a few days before the end of the year. You can deduct the expenses in the year you mail the checks. If you’re mailing a big check, use registered mail to prove the mailing date.
• Prepay expenses at the end of the year, provided that the benefit does not exceed IRS limitations (the earlier of 12 months before the first date on which your business realizes the benefit or the end of the next tax year). For example, you could prepay your office rent or some of your insurance premiums.
• Bunch expenses. Bundling expenses toward the end of the year may be helpful to maximize deductions.
• Delay sending invoices until the last few days of the year. That way, you’ll receive payment in the new year and can report the income in the new year as well.

The last strategy requires caution. Don’t delay sending invoices to customers who pay slowly. If you defer your expenses, you must report them in the following year. There is no special filing deadline for deferments.

12. Hire Your Spouse or Children

If your spouse or children can contribute to your business,  put them on the payroll. Kids can work tax-free if their income is below the IRS threshold. The Tax Cuts and Jobs Act of 2018 nearly doubled the exemption amount for dependent minors.

You can take the money you pay your kids and put it into an education savings account or Roth IRA as a bonus. You also won’t need to withhold payroll taxes. Consult your accountant on applying this to your situation, as entity type matters to participate in this.

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

The business entity type you choose significantly impacts your tax liability. As we mentioned, people who are sole proprietors, have limited partnerships or certain limited liability companies, and are on the hook to pay self-employment taxes. Depending on how much you earn as a sole proprietor or employee of any pass-through entity, you may also have to pay the additional 0.9% Medicare tax.

If your estimated business taxes are high, you may want to consider reorganizing your business as a different type of entity. Navigating the ins and outs of different business entity types can be confusing, so working with a tax professional to determine the appropriate structure for your business is beneficial.

14. Write Off Bad Debts

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 and services, your instinct may be to try to collect them continually, 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 loans you may have made to employees or vendors, and consider whether they should be written off as bad debt. Writing these debts off can help you offset what you owe on your taxes and reduce your overall tax obligation. It’s important to note that this applies to accrual-basis taxpayers only (see below).

15. Review Your Accounting Method

As a business owner, there are several accounting methods; in some cases, you may have a choice about which method to use. The two most common methods are the cash method and the accrual method.

With the cash method, you must report any money you receive and any business expenses you incur in the year you pay them. This method is available to many small businesses, but businesses with average gross receipts of more than $30 million for the past three years aren’t eligible for the 2025 tax year.

The other option is the accrual method, which allows you to report income in the year it’s earned and expenses in the year they’re incurred. Both methods have benefits, and you should consult with your accountant to determine which best suits your business needs.

16. Check If You’re Eligible for Penalty Relief

Sometimes, despite their best efforts, business owners incur a penalty from the IRS. The penalty could be because they missed a tax filing deadline or underpaid their taxes, and in some cases, the penalties can be significant.

If you incur a penalty, seeing if you’re eligible for penalty relief is worthwhile. Some circumstances that may be eligible for penalty relief include:

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

You can check with the IRS or your accountant to determine your eligibility for penalty relief. Often, the IRS will remove the first penalty assessed to you.

17. Pay Down Your Debt

If you have an outstanding business loan and cash on hand, you may want to make extra payments or even pay off the loan entirely to deduct the interest when you file your tax return.

Keep in mind that the IRS doesn’t allow an interest deduction for personal expenses paid with a credit card. You can view IRS Publication 334 for information about non-farm business interest deductions and IRS Publication 225 for interest deductions for farms.

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

There are several important changes to tax law that you’ll need to know in 2025.

1. Increased Standard Deduction. The IRS has increased the standard deduction to $15,000 for single filers and married filing separately, $30,000 for married filing jointly and qualified widows/widowers, and $22,500 for single heads of household. Single taxpayers who are 65 or older and those who are blind can take an additional $2,000, while married/widowed taxpayers can take an additional $1,600.
2. Updated Tax Brackets. You can view the updated brackets on the IRS website, here.
3. Business Meal Deduction. During the COVID-19 pandemic, the IRS allowed for 100% of business meal costs to be deducted. For 2025, the amount has reverted to its pre-pandemic level of 50%.
4. Bonus Depreciation. The Tax Cuts and Jobs Act temporarily allowed business owners to write off 100% of the cost of qualified assets placed into service from September 27, 2017, through January 1, 2023. Bonus depreciation allows an 80% deduction for 2023, a 60% deduction for 2024, and a 40% deduction for 2025. The deduction will decrease by 20% per year and expire in 2027.
5. Employer Retirement Plan Start-Up Credit. For the 2025 tax year, small employers with 100 or fewer employees can deduct 100% of the start-up costs associated with a new retirement plan, up to $5,000 per year. Employers with more than 50 employees but fewer than 101 employees can deduct 50% of start-up costs, up to $5,000 per year. The deduction may be taken for a maximum of three years. Additionally, starting in 2025, employers can qualify for a $500 annual tax credit for three years if their retirement plan includes an automatic enrollment feature.

We’ll update this post to keep you informed if any new changes are made.

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

One of the best things you can do as a small business owner to minimize the tax you’re required to pay is to consult a tax advisor. Even if you keep a close eye on business news and stay current on tax law changes, you still need professional advice to help you file your taxes.

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.

The AMT credit can help you avoid paying a higher tax rate by offering a dollar-to-dollar reduction on previous years' taxes. Check our blog post, Alternative Minimum Tax Explained to find out how this works.

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 a frequently asked question because people want to know how much they’ll need to pay so they can prepare and have the money they need to meet their tax obligations.

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 that showed an average of 19.8% as the effective tax rate for small businesses. The percentages can vary depending on your business structure and other factors.

Business owners may need to pay six basic types of taxes. They are as follows:

• Income tax
• Self-employment tax
• Estimated tax
• Employer tax
• Excise tax
• Sales tax

The Tax Cuts and Jobs Act of 2017 changed the tax code for corporations. As of January 1, 2018, C corporations have a flat % corporate income tax rate of 21%, which remains in effect for 2025. This rate does not apply to other business structures. But not, if you have a sole proprietorship or partnership—and in some cases, an LLC—you may need to pay self-employment tax.

Why is Tax Planning Important for Small Businesses?

As a business owner, paying taxes is your duty, but the amount you owe should never be a surprise. It’s essential to understand how business taxes work and estimate the amount you need to pay each quarter or year to ensure you have the appropriate amount.

Tax planning can help you make accurate tax estimates, make all tax filings and reports on time, and avoid the potential repercussions of not doing so. As business taxes can be complicated, we recommend working with an experienced tax professional to help you plan. Tax planning is often the best way to find tax savings.

How Can Setting Up or Adding to a Retirement Savings Plan Benefit Small Business Tax Planning?

If you set up a new retirement plan for your employees, such as a 401(k), SEP IRA, or SIMPLE IRA, you may be eligible to deduct up to 50% of your start-up expenses for up to three years. The maximum deduction is $5,000; you must have fewer than 101 employees to qualify.

There are some rules about when the plan must be started to qualify. You can read more here. There may also be an option to deduct part of your employer matching contributions. Make sure to check with a financial professional before claiming this deduction.

If you are 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?

The bonus depreciation percentage was 100% from 2020 to 2022, as part of the economic stimulus related to the COVID-19 pandemic. Starting in 2023, it is slated to decrease by 20% each year. 

The bonus depreciation rate for 2025 will be 40%. This means businesses that put qualified equipment into service in 2025 can deduct 40% of the cost in the year of purchase.

Green energy tax credits were included in the Inflation Reduction Act. Nearly $400 billion in available credits may be used to offset the expense of buying electric or hybrid clean vehicles for your business and other steps that can decrease your carbon footprint. You should check with a financial professional to understand your qualifications.

How Can Adopting Pass-Through Entity Status Aid in Small Business Tax Planning to Reduce Taxes?

Pass-through entities include some businesses that may be on the hook for business income taxes. These include S corporations and LLCs. Several states have implemented a pass-through entity tax that may be deducted from your business’s federal tax return.

Utah enacted a pass-through entity tax in 2022. In total, 35 states, including California and Arizona, have enacted a PTE tax.

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 planning strategies we’ve reviewed here can help you understand your tax obligations and minimize your tax burden as you head into 2025.

Need assistance with your income tax strategy? CMP, a trusted accounting firm in St. George and throughout Utah, with additional locations in Salt Lake City and Logan, can help you develop an effective tax plan tailored to you and your business. Contact us today to get started!