Tax Planning Strategies for Business Owners

Effective tax planning is not just about meeting your obligations—it’s also about legally minimizing your tax liability while staying compliant with the law. For business owners, understanding the intricacies of the tax code can translate into more savings down the line. 

Tip #1: Start Early and Be Proactive

Tax planning should not be a year-end scramble. Waiting until the final quarter may limit the ability to leverage deductions or implement structural changes that could reduce your tax burden. Being proactive about your taxes usually involves forecasting, budgeting, and staying informed about changes in tax law that may impact your business.

Tip #2: Choose the Right Business Entity

The structure of your business has major implications for your tax responsibilities. 

• Sole Proprietorship: Income is reported on your personal tax return, which can lead to higher self-employment taxes.
• LLC (Limited Liability Company): Offers flexibility in taxation. You can be taxed as a sole proprietorship, partnership, or corporation.
• S Corporation: Allows income to “pass through” to the owner’s personal return but avoids some self-employment tax by dividing income into salary and distributions.
• C Corporation: Subject to corporate tax rates, but allows for retained earnings and certain fringe benefits.

Picking the best entity and periodically reevaluating that choice can make all the difference.

Tip #3: Maximize Deductible Business Expenses

Business deductions reduce taxable income, but only if properly tracked and categorized. Some of the common deductible expenses include:

• Rent or lease payments
• Office supplies and equipment
• Business travel and meals
• Professional fees (legal, accounting)
• Marketing and advertising costs
• Insurance premiums

Use digital accounting software or hire a bookkeeper to ensure nothing slips through the cracks. Keep thorough documentation to substantiate each deduction in case of an audit.

Tip #4: Implement an Accountable Plan

Consider adopting an accountable plan if you’re operating a corporation and reimburse yourself or employees for out-of-pocket business expenses. This IRS-approved arrangement excludes expense reimbursements from wages, meaning neither the employer nor the employee pays payroll tax on the reimbursement. 

To qualify, employees must provide receipts and return excess reimbursements promptly.

Tip #5: Leverage Depreciation and Section 179 Deductions

Purchasing large equipment or vehicles for your business offers the opportunity to deduct the cost over time through depreciation. However, under Section 179, you can write off the entire cost in the year of purchase, up to a specified limit.

Benefits of Section 179:

• Immediate tax savings
• Improved cash flow
• Incentive to reinvest in your business

The annual deduction limit for Section 179 changes based on inflation, so it’s wise to consult the IRS website or your accountant for current limits.

Tip #6: Take Advantage of the QBI

The QBI deduction, introduced under the Tax Cuts and Jobs Act, allows eligible pass-through entities to deduct up to 20% of qualified business income.

Eligibility Considerations:

• Applies to sole proprietorships, partnerships, S corporations, and some trusts
• Subject to income limits and phase-outs, particularly for service-based businesses
• May be reduced if the business pays minimal W-2 wages or owns little qualified property

Careful planning and income management can help maximize this deduction.

Tip #7: Time Income and Expenses Strategically

Tax planning isn’t only about how much income you generate—it’s also about when you recognize that income and deduct expenses.

Best Practices:

• Accelerate expenses into the current year if you expect higher earnings
• Defer income into the next year if your tax rate will be lower
• Prepay certain expenses like rent, subscriptions, or insurance

This timing strategy is especially effective for businesses using cash accounting, where revenue and expenses are recorded when money changes hands.

Tip #8: Set Up a Retirement Plan

Creating a retirement plan for yourself and your employees can serve a dual purpose: preparing for the future and reducing current tax liability.

Popular Retirement Plans Include:

• SEP IRA: Easy to establish, allows employer-only contributions
• SIMPLE IRA: For businesses with fewer than 100 employees
• Solo 401(k): Ideal for solo owners or those with a spouse as the only employee
• Defined Benefit Plan: Best for high earners who want to make large contributions

Bear in mind that contributions are tax-deductible and grow tax-deferred. These plans also make your business more attractive to potential hires.

Tip #9: Consider Hiring Family Members

Employing family members like your spouse or children can be a legitimate and strategic tax-saving move. For instance:

• Children under 18 working for a sole proprietorship or LLC taxed as a sole proprietorship are exempt from Social Security and Medicare taxes.
• Wages paid must be reasonable for the work performed and adequately documented.
• Shifting income to a child in a lower tax bracket can reduce family tax liability.

Additionally, wages paid to children can be used to fund Roth IRAs, teaching them early financial responsibility and creating tax-advantaged retirement savings.

Tip #10: Use Health Savings Accounts (HSAs)

If you offer a high-deductible health plan (HDHP), consider opening an HSA. Contributions to HSAs are triple tax-advantaged:

1. Deductible from income
2. Grow tax-free
3. Withdrawals are tax-free when used for qualified medical expenses

For 2025, individuals can contribute up to $4,150, and families can contribute up to $8,300, with an additional $1,000 for those over 55.

Tip #11: Manage Inventory and Cost of Goods Sold

For product-based businesses, how you account for inventory and calculate your cost of goods sold (COGS) directly impacts taxable income. Options include:

• FIFO (First-In, First-Out)
• LIFO (Last-In, First-Out)
• Specific Identification
• Weighted Average

Choosing the most advantageous method depends on economic conditions, price fluctuations, and industry. An inventory method change requires IRS approval, which should be considered part of a long-term strategy.

Tip #12: Use Tax Credits to Offset Liabilities

Unlike deductions, which reduce taxable income, tax credits directly reduce the amount of tax owed. Business owners should explore all available credits, such as:

• Research and Development (R&D) Credit
• Work Opportunity Tax Credit
• Disabled Access Credit
• Energy-Efficient Commercial Building Deduction (179D)

These incentives often go unclaimed due to a lack of awareness or documentation, so always consult a tax expert to determine eligibility.

Tip #13: Plan for Estimated Taxes and Avoid Penalties

The IRS expects self-employed individuals and business owners to pay taxes throughout the year. Failing to make quarterly estimated payments can result in interest and penalties. These payments should be based on your projected income, deductions, and credits.

To avoid surprises:

• Recalculate estimates quarterly.
• Adjust payments based on seasonal trends or unexpected revenue.
• Set aside funds in a tax-dedicated account to prevent cash flow disruptions.

Tip #14: Establish a Bookkeeping and Accounting System

Proper financial records are the foundation of effective tax planning. Poor documentation leads to missed deductions and increases your audit risk.

Best Practices:

• Use accounting software like QuickBooks or Xero
• Reconcile bank accounts monthly
• Maintain separate personal and business accounts
• Hire a professional bookkeeper or CPA for monthly or quarterly reviews

An organized system makes implementing tax strategies and identifying red flags easier.

Tip #15: Conduct Annual Tax Reviews

Your business changes every year—so should your tax strategy. An annual review helps ensure your current structure, deductions, and contributions still align with your financial goals.

Checklist for Annual Review:

• Review prior-year tax return
• Analyze income and expense trends
• Adjust estimated payments
• Identify new deductions or credits
• Meet with a tax advisor or CPA

Don’t wait until tax season. Proactive reviews can prevent surprises and maximize savings.

Think Ahead and Plan Your Business Taxes Properly

The most successful business owners view taxes not as a once-a-year burden but as a year-round opportunity for smarter financial management. Every decision matters, from choosing the right entity to leveraging credits, retirement planning, and expense tracking. Begin early, stay organized, and seek expert help when needed.  

Let’s Plan Ahead

Let our team at NCH help you reduce your tax liability, protect your assets, and maximize your profits. Whether you’re just starting your venture or looking to optimize an established enterprise, we provide expert guidance on entity selection, asset protection, tax planning, and compliance. That way, you can focus on running and growing your business.

Call 1-800-508-1729 to start building a smarter financial future for your business!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.