Small businesses often leave legitimate savings on the table, and many owners know it. According to a Clutch survey, nearly 30% of small business owners believe they overpay their taxes. Between complicated IRS guidelines and constantly changing regulations, it’s easy to overlook deductions that would reduce your costs and free up cash for growth.

The good news is you don’t need complex strategies to lower what you owe. Everything in this guide focuses on legal tax avoidance (not tax evasion) and shows how year-round planning helps you maximize deductions, minimize liability, and keep more money in your business.

Understanding your business entity structure and tax implications

Your business structure directly affects how your income is taxed, how much you pay in self-employment taxes, and which deductions or credits you can claim. Choosing the right structure lays the groundwork for long-term tax savings.

Business entity structures

Each business structure comes with its own tax treatment, affecting everything from your personal liability to how much you owe the IRS each year.

Sole proprietorship

A sole proprietorship is the simplest business structure where you and your business are legally the same entity for tax purposes.

Tax advantages:

• Simple tax filing using Schedule C on your personal return
• All business losses directly offset your personal income
• No separate business tax return required
• Full control over business decisions and profits

Tax disadvantages:

• Subject to self-employment tax on all net profits (15.3%)
• No ability to split income or reduce self-employment taxes
• Limited options for tax-advantaged retirement contributions
• All business income taxed at your personal rate

This structure works best for low-risk businesses with modest income, typically under $50,000 annually. Once you exceed this threshold, other structures may offer better tax benefits.

Limited liability company (LLC)

An LLC provides liability protection while offering flexibility in how you're taxed. By default, single-member LLCs are taxed as sole proprietorships.

Tax advantages:

• Choose your tax treatment (sole proprietor, partnership, or corporation)
• Option to elect S corp status as your business grows
• Pass-through taxation sends profits to your personal return
• Simpler compliance compared to traditional corporations

Tax disadvantages:

• Still subject to full self-employment tax without an S corp election
• More expensive to set up than sole proprietorships
• Annual fees and filing requirements vary by state
• May require separate business bank accounts

LLCs offer flexibility for growing businesses that want liability protection while keeping future tax planning options open.

S corporation

An S corporation is a tax election that allows you to split your income between salary and distributions, potentially reducing self-employment taxes.

Tax advantages:

• You pay self-employment tax only on your salary, not distributions
• Potential savings of $5,000–$15,000 or more in employment taxes
• Pass-through taxation avoids double taxation
• Access to more favorable retirement plan options

Tax disadvantages:

• Must pay yourself a reasonable salary
• Strict ownership requirements
• More complex bookkeeping and payroll obligations
• Additional state filing fees and compliance costs

S corps typically make sense when net profit exceeds $60,000–$80,000 annually, as tax savings begin to outweigh administrative costs.

C corporation

A C-corp is a separate tax entity that pays its own corporate income tax. This structure works best for businesses planning to raise outside investment.

Tax advantages:

• Flat 21% corporate tax rate on retained earnings
• Broader range of fringe benefits and deductions
• No restrictions on ownership or stock classes
• Attractive structure for investors

Tax disadvantages:

• Double taxation when profits are distributed
• More complex compliance and reporting requirements
• Higher administrative and legal costs
• Less flexibility in profit distribution

C-corps often suit companies reinvesting most profits or pursuing venture capital funding.

Choosing the right business structure

The key difference between pass-through and corporate taxation determines how your income is taxed. Pass-through entities such as sole proprietorships, partnerships, LLCs, and S corps send profits to your personal return, where rates range from 10% to 37%. Corporate taxation applies to C-corps, where the business pays a flat 21% corporate rate before any shareholder distributions.

Self-employment tax impact

Self-employment tax represents one of the biggest differences between entity structures. As a sole proprietor or standard LLC owner, you pay 15.3% on all net business income. An S corp lets you classify some income as distributions rather than wages.

For example, if your business nets $100,000, you might pay yourself a $60,000 salary and take $40,000 as distributions. You pay self-employment tax on the salary only, saving roughly $6,120 annually.

Tax savings examples

At $40,000 in annual profit, a sole proprietorship still makes sense. Your self-employment tax is $6,120, and the administrative costs of an S corp would likely outweigh savings.

With $80,000 in profit, an S corp becomes attractive. A $55,000 salary and $25,000 distribution saves around $3,825 in employment taxes. After administrative costs, the net savings generally fall between $1,825 and $2,825.

At $150,000 in profit, a $90,000 salary with $60,000 in distributions saves roughly $9,180. After accounting for administrative expenses, most businesses still keep an extra $7,000–$8,000.

When to consider restructuring your business

Income level is the main signal to reconsider your structure. Once net profit consistently exceeds $60,000, an S corp election usually produces meaningful tax savings. Above $100,000, the benefits often justify the added complexity.

Rapid growth or changes in your business model may also prompt restructuring, especially if you're adding partners or preparing for outside investment.

Evaluating the costs and benefits

Restructuring costs typically include filing fees ($100–$800), legal assistance ($500–$2,000), and accounting setup ($500–$1,500). Ongoing compliance usually adds $1,000–$3,000 annually. Compare these costs against expected tax savings to determine whether the shift is worthwhile.

Making the change

Converting to an S corp requires filing Form 2553 with the IRS. You’ll also need payroll in place, even if you're the only employee. Most businesses aim for a January 1 effective date to simplify recordkeeping.

Forming an LLC involves filing articles of organization with your state, which generally takes 4–6 weeks. Converting between entity types mid-year can complicate taxes, so plan ahead if possible.

Maximizing small business tax deductions

You may be missing out on valuable deductions simply because you don't know what qualifies or how to document expenses properly. Here are some of the most commonly overlooked deductions.

• Bank fees and merchant services: Transaction fees, monthly account charges, and credit card processing costs are fully deductible. Keep monthly statements and year-end summaries from your bank and payment processors.
• Business insurance premiums: General liability, professional liability, property, and business interruption insurance all qualify. Save annual policy statements and payment receipts from your insurance provider.
• Professional development: Industry conferences, trade publications, online courses, and professional memberships reduce your tax bill. Document these with registration confirmations, receipts, and membership renewal notices.
• Software subscriptions: Cloud-based tools for accounting, project management, email marketing, and design are deductible business expenses. Keep invoices and credit card statements showing recurring charges.
• License and permit fees: Business licenses, professional certifications, industry-specific permits, and regulatory compliance fees qualify. Retain renewal notices and payment confirmations from issuing agencies.
• Legal and professional fees: Costs for attorneys, accountants, consultants, and business coaches are deductible when related to your operations. Save detailed invoices showing services and dates.
• Bad debts: Uncollectible invoices can be written off once you've made reasonable collection efforts. Document these with original invoices, collection attempts, and written communication records.
• Startup costs: You can deduct up to $5,000 in qualified business launch expenses. Keep receipts for market research, advertising, training, and pre-opening operational costs.
• Business gifts: Deduct up to $25 per recipient each year for client gifts. Maintain a gift log with recipient names, dates, amounts, and the business purpose.
• Office supplies and equipment: Items such as printer paper, laptops, monitors, and furniture under $2,500 qualify for immediate deduction. Keep receipts showing item descriptions, purchase dates, and business use.

Set up a dedicated business bank account and credit card to keep personal and business expenses separate. This creates a clear paper trail that makes tax preparation easier and helps during audits.

Use accounting software or expense tracking tools to categorize transactions as they occur. Snap photos of paper receipts immediately and store them digitally. Reconcile accounts weekly to avoid missed deductions or errors. Create simple folders or labels for each expense category to stay organized.

Industry-specific deductions

• Construction: Small tools, safety gear, equipment rentals, project travel
• Retail and e-commerce: Packaging supplies, shipping insurance, merchant processing fees
• Professional services: Continuing education, certifications, client gifts, liability insurance
• Food and beverage: Uniforms, sanitation supplies, menu development costs
• Manufacturing: Prototype materials, quality testing, equipment maintenance

Home office deduction

The simplified method lets you deduct $5 per square foot of office space, up to 300 square feet. A 200-square-foot home office, for example, results in a $1,000 deduction with minimal documentation.

The actual expense method requires tracking your home's total square footage and calculating what percentage your office occupies. You apply that percentage to mortgage interest, property taxes, utilities, insurance, repairs, and depreciation.

For example, if your office is 150 square feet in a 1,500-square-foot home, you use 10% of your home for business. With $20,000 in eligible home expenses, you'd deduct $2,000. This method takes more work but often yields larger deductions for bigger office spaces.

Many business owners think claiming a home office deduction triggers audits, but the IRS mainly scrutinizes businesses that fail the exclusive-use test. Your office space must be used solely for business, with no personal activities in that area.

Vehicle expenses

The IRS requires mileage logs showing dates, destinations, business purposes, and miles driven. Apps can track this automatically, or you can maintain a paper logbook. Record your odometer reading on January 1 and December 31 each year.

The standard mileage rate for 2025 is $0.70 per mile. Multiply your business miles by this rate to calculate your deduction. If you drove 10,000 business miles, that's a $7,000 deduction with minimal documentation.

The actual expense method requires tracking all vehicle costs—gas, repairs, insurance, registration, depreciation—and applying your business-use percentage. This method works best for vehicles with high operating costs.

Travel expenses

Business travel deductions cover transportation, lodging, meals (50% deductible), and incidental expenses when traveling overnight for business. Local day trips qualify only for transportation deductions, while overnight trips allow you to deduct lodging and meals.

Retirement plan contributions

Retirement plan contributions offer meaningful tax advantages. SEP IRAs let you contribute up to 25% of compensation or $70,000 for 2025, whichever is less. Solo 401(k) plans allow even higher contributions by combining employer and employee limits.

These contributions reduce your taxable income while building long-term savings. For example, a business owner earning $100,000 could contribute $25,000 to a SEP IRA and reduce taxable income to $75,000.

Health insurance premiums

Health insurance premiums for self-employed individuals are 100% deductible as an adjustment to income. This includes medical, dental, and long-term care insurance for you, your spouse, and dependents under age 27. You cannot claim the deduction for months when you're eligible for employer-sponsored coverage through a spouse.

Education expenses

Education expenses that maintain or improve skills required in your business are fully deductible. This includes seminars, workshops, certifications, industry training, and relevant college courses. Books, subscriptions, and online courses qualify when related to your current work.

Leveraging business tax credits

Tax credits reduce your tax bill dollar for dollar, making them more valuable than deductions and worth the effort to claim.

Business tax credits offer substantial savings, yet many companies overlook them while focusing only on deductions. Understanding which credits you qualify for — and how to document them — can significantly reduce your overall liability.

Research and development tax credit

The R&D tax credit rewards businesses that develop new or improved products, processes, or software. You don’t need a lab or a patent to qualify. Activities such as improving existing products, building prototypes, solving technical uncertainties, and refining production methods often meet the criteria.

Small businesses with gross receipts under $5 million can apply the credit against payroll taxes. This option makes the credit valuable for early-stage companies without income tax liability. Examples of qualifying activities include.

• Software development: Building new features, debugging complex code, developing algorithms, optimizing database performance, or integrating third-party APIs when these steps involve technical uncertainty
• Manufacturing: Designing new production methods, improving product durability, reducing defect rates, or automating assembly processes through experimentation
• Food and beverage: Testing ingredients, improving shelf life, updating production processes, or creating new flavors through systematic experimentation
• Construction: Developing new building techniques, testing alternative materials, improving energy efficiency, or solving structural challenges

Documentation is critical. Track employee hours spent on qualifying tasks, materials costs, contractor expenses, design notes, test results, and any communication that reflects technical challenges. Contemporary records are far more reliable than reconstructed documentation prepared during tax season.

Work opportunity tax credit

The Work Opportunity Tax Credit (WOTC) offers credits ranging from $2,400 to $9,600 per qualified employee for hiring individuals from specific groups facing employment barriers. Eligible categories include:

• Veterans: Unemployed veterans, disabled veterans receiving benefits, veterans receiving SNAP benefits, and veterans unemployed for at least four weeks in the prior year
• SNAP recipients: Individuals receiving Supplemental Nutrition Assistance Program benefits for at least three months before hire
• Long-term unemployment: Workers unemployed for 27 weeks or more before their hire date
• Ex-felons: Individuals convicted of a felony who are hired within one year of conviction or release

For example, hiring a disabled veteran can generate a $9,600 credit, while hiring multiple long-term unemployed workers can produce several thousand dollars in savings. A restaurant hiring five SNAP-eligible employees could claim $12,000 in credits.

To claim the credit, you must submit Form 8850 to your state workforce agency within 28 days of an employee's start date. Applicants should also complete US Department of Labor Form 9061 on or before their hire date. Missing these deadlines disqualifies the credit, even if the employee is otherwise eligible.

Energy efficiency credit

The energy efficiency credit offers an incentive for installing electric vehicle charging stations used in your business. The credit covers 30% of the cost, up to $100,000 per location. For example, installing four stations at $8,000 each generates a $9,600 credit.

Claim the credit by filing Form 3468 with your tax return for the year the equipment is placed in service. Installation timelines can range from two to four months, so planning ahead helps ensure the credit applies in the intended tax year.

Understanding the qualified business income deduction

The qualified business income (QBI) deduction allows many small business owners to reduce their taxable income by up to 20%, making it one of the most valuable deductions available to pass-through entities.

The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their qualified business income from their taxable income. For example, if your business generates $100,000 in qualified income, you could potentially deduct $20,000.

Pass-through entities such as sole proprietorships, partnerships, S corps, and LLCs qualify for this deduction. C-corps do not qualify because they are taxed separately at the corporate level.

The deduction phases out at higher income levels and comes with limitations based on your type of business, total income, W-2 wages paid, and property owned. These restrictions begin at specific income thresholds that vary by filing status.

Income thresholds and phase-outs

For 2025, the full QBI deduction is available to single filers with taxable income below $197,300 and married couples filing jointly below $394,600. Above these amounts, limitations begin to phase in over the next $50,000 for single filers and $100,000 for joint filers.

Once your income exceeds $247,300 (single) or $494,600 (joint), the full limitations apply. At these higher income levels, specified service businesses may lose the deduction entirely, while other businesses face restrictions based on W-2 wages and property basis.

Calculation examples

A single consultant earning $150,000 in QBI qualifies for the full 20% deduction of $30,000, reducing taxable income to $120,000.

A married couple running a retail store with $500,000 in QBI faces limitations. Their deduction is the greater of 50% of W-2 wages paid ($150,000 in wages = $75,000) or 25% of wages plus 2.5% of property basis. If they paid $150,000 in wages and own $400,000 in qualifying property, their deduction is $75,000 rather than the unrestricted $100,000.

A single architect earning $250,000 operates a specified service business above the upper threshold. Their QBI deduction is eliminated, regardless of wages or property owned.

Qualifying for QBI deduction

This deduction applies to most pass-through business entities, though specific rules determine eligibility and the amount you can claim. Eligible business types include:

• Sole proprietorships: Income reported on Schedule C qualifies for the QBI deduction
• Partnerships and multi-member LLCs: Each partner's distributive share of business income qualifies, reported on Schedule K-1
• S corporations: Shareholders receive QBI information on Schedule K-1, and the deduction applies to business income, not reasonable compensation paid as W-2 wages
• Single-member LLCs: Treated as sole proprietorships for tax purposes, so all business income reported on Schedule C qualifies

Specified service trade or business limitations

Specified service trades or businesses (SSTBs) include health, law, accounting, consulting, financial services, brokerage services, and any business where the principal asset is the reputation or skill of employees or owners. Athletes, entertainers, and investment management professionals are also included.

Below the income thresholds, SSTBs receive the full QBI deduction. Within the phase-out range, the deduction gradually decreases. Above the upper threshold, SSTB owners lose the deduction entirely.

Engineering and architecture firms qualify as SSTBs only when they provide consulting services rather than direct construction or project delivery. This distinction affects whether high-earning professionals in these fields can claim the deduction.

W-2 wage and property limitations

Once income exceeds threshold amounts, the QBI deduction is limited to the greater of 50% of W-2 wages paid or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property.

Qualified property includes tangible assets subject to depreciation with a depreciable period that has not ended. Real estate, equipment, and vehicles qualify, while inventory and assets held for investment do not.

These limitations do not apply to businesses below income thresholds. They phase in during the $50,000 or $100,000 range and apply fully once income exceeds the upper limit.

Maximizing your QBI deduction

Managing your income relative to QBI thresholds can preserve or increase your deduction. Strategies such as adjusting retirement contributions or timing income and expenses can help you stay below critical limits.

Strategies for staying under income thresholds

Increasing retirement plan contributions reduces taxable income without reducing the QBI base. For example, a $66,000 SEP IRA contribution could drop taxable income from $450,000 to $384,000 for a married couple filing jointly, potentially preserving the full QBI deduction.

You can also time large income items to spread them across tax years. If a single payment would push you above the threshold, splitting it between December and January can help.

Health insurance premiums, equipment purchases, and prepaid expenses can further reduce current-year income. Making these payments before December 31 lowers your taxable income while advancing necessary business expenses.

Timing income and expenses

Cash-basis taxpayers can defer income by delaying invoicing or requesting that clients pay in January rather than December. Accelerating deductible expenses — such as equipment purchases, prepaid services, or employee bonuses — can reduce current-year income.

Section 179 expensing allows immediate deductions for qualifying equipment purchases up to $1.25 million for 2025. These purchases must be placed in service by year-end to qualify.

Coordination with retirement contributions

SEP IRA and Solo 401(k) contributions reduce taxable income while preserving QBI. Since these contributions are not included in QBI calculations, they lower overall income without reducing the base for the 20% deduction.

For owners in the phase-out range, a retirement contribution may preserve the deduction that would otherwise be lost. The tax savings from maintaining the full QBI deduction can exceed the value of the retirement contribution deduction alone.

Timing contributions carefully helps coordinate them with year-end strategies.

Strategic tax planning for small business

Year-round tax planning helps you avoid surprises and gives you more opportunities to lower your taxable income before the year ends.

Consistent planning means checking in on your financial position throughout the year and making adjustments as circumstances change. This approach prevents rushed decisions in December and gives you time to use strategies that require advance planning or specific timing. Here’s a quarterly tax planning checklist to guide your process:

• First quarter (January–March): Finalize prior-year tax returns and review what worked or didn’t. Set up retirement accounts if needed. Reevaluate your entity structure. Update your bookkeeping systems and accounting software.
• Second quarter (April–June): Calculate your year-to-date profit and estimate annual income. Adjust quarterly estimated tax payments if income is significantly higher or lower than expected. Document major purchases or operational changes.
• Third quarter (July–September): Review profit margins and expense categories. Plan for any equipment purchases before year-end. Estimate taxable income and compare it to QBI deduction thresholds.
• Fourth quarter (October–December): Execute year-end strategies such as equipment purchases, expense acceleration, and retirement contributions. Reconcile accounts, gather documentation, and schedule a planning session with your accountant.

State and local tax considerations

State income tax rates range from 0% to nearly 13%, so your location can significantly affect your tax burden. Some cities impose additional business taxes or license fees. Research local requirements to avoid penalties.

Sales tax compliance can be complex for businesses selling across state lines. Economic nexus laws require out-of-state sellers to collect sales tax once they exceed certain revenue or transaction thresholds.

Some states do not fully conform to federal rules on Section 179 or bonus depreciation, so review your state’s treatment before making large purchases.

Quarterly tax planning activities

Check your profit and loss statements at the end of each quarter to track performance against expectations. Compare revenue and expenses to prior quarters and the same quarter last year to identify trends or irregularities.

Calculate your year-to-date net profit and use it to project annual taxable income. This helps determine whether estimated tax payments should be adjusted.

The IRS safe-harbor rules require you to pay at least 90% of your current-year tax liability or 100% of your prior-year liability (110% for higher-income taxpayers) to avoid underpayment penalties. Use these thresholds to determine whether your payments are on track.

Document major purchases immediately with invoices, receipts, and notes outlining their business purpose. Track mileage for business vehicles with an app or logbook. Save emails and contracts related to major decisions or purchases, as they support deductions if reviewed by the IRS.

Year-end tax strategies

The end of the year offers opportunities to reduce taxes through thoughtful timing and purchases. Many decisions made in December can meaningfully affect your tax liability for the year.

Accelerating expenses and deferring income

Pay deductible expenses before December 31 to claim them in the current year. This includes rent, insurance premiums, professional fees, supplies, and maintenance. Prepay up to 12 months of certain expenses to accelerate deductions.

Push income into the following year by delaying December invoicing or asking clients to pay in January. This is particularly helpful if you expect to be in a lower tax bracket next year.

Time your retirement plan contributions carefully. While contributions can be made until the filing deadline, deciding on them in December helps coordinate with other year-end strategies.

Equipment purchases and Section 179

Section 179 lets you immediately expense up to $1.25 million in qualifying equipment purchases for 2025. Assets must be purchased and placed in service by December 31 to qualify. Bonus depreciation allows you to deduct remaining equipment costs once Section 179 is applied.

Retirement plan contributions

Contributing to retirement plans reduces your taxable income while building long-term savings. SEP IRAs allow contributions up to 25% of compensation or $70,000 for 2025. Solo 401(k) plans offer higher limits by combining employee and employer contributions. If you are 50 or older, catch-up contributions add another $7,500 to your limit.

New retirement plans must be established by December 31, though you can make contributions until your tax filing deadline. Planning ahead gives you time to coordinate contributions with other strategies.

Working with tax professionals

Tax professionals range from seasonal preparers to year-round CPAs with small-business expertise. The right choice depends on your business needs and comfort level with tax matters.

When to hire a CPA vs. tax preparer

CPAs offer comprehensive services including tax planning, financial statements, audit representation, and advisory support. They are ideal for businesses with complex income, multiple entities, or significant assets.

Enrolled agents specialize in tax matters and can represent you before the IRS at a lower cost than CPAs. They work well for straightforward businesses needing preparation and occasional planning.

Seasonal preparers offer basic filing services at a lower price. They suit simple businesses with predictable income and expenses.

Evaluating potential tax advisors

Ask prospective advisors about their experience with businesses similar to yours. Discuss their approach to planning versus preparation. Confirm their availability throughout the year, especially outside of tax season.

Request details about fees and which services are included. Some advisors charge flat rates per return, while others use hourly or retainer models.

Cost-benefit analysis

Professional tax preparation typically costs $500 to $3,000 depending on complexity. Consider the value of time saved and potential deductions you might miss. If an advisor uncovers $10,000 in overlooked deductions, the tax savings often exceed the preparation fee.

Software vs. professional preparation

Tax software works well for basic situations with straightforward income and expenses. Programs such as TurboTax Business or H&R Block cost far less than full-service preparation.

Software can struggle with multi-entity structures, complex depreciation, employee benefits, or multi-state operations. These scenarios benefit from professional guidance.

A hybrid approach works well for many small businesses: use software for bookkeeping throughout the year and hire a professional for annual planning and tax preparation.

Use Ramp to track your deductible business expenses

As a small business owner or startup founder, navigating your business tax deductions can be a tough process. But it doesn’t have to be that way.

Ramp’s best-in-class expense management software automates business expense tracking and reporting. Ramp uses AI to categorize your business expenses as soon as you incur them, making it easy to identify which expenses are tax-deductible.

Our modern finance platform saves time, reduces errors, and helps simplify the process of writing off business expenses. We can even offer intelligent recommendations for where you can reduce spend to improve your bottom line.

Watch a demo video to see how customers who use Ramp save an average of 5% a year.

The information provided in this article does not constitute accounting, legal, or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.