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 your company’s current financial performance and adjusting your tax strategy accordingly, taking advantage of favorable tax pass-through provisions or setting up a retirement plan for you and your employees. “With changes in estate and gift tax exemptions coming after December 31, 2025, you may also want to consider ways of transferring more of your business out of your estate,” says accountant Vinay Navani of WilkinGuttenplan.

Whatever your situation, year-end tax decisions could have a significant impact on your tax position now and for years to come. As you work with your tax advisor, consider whether the eight strategies below could help.

1. If it’s been a strong year, consider whether you may have the ability to defer revenue recognition and accelerate expenses

“The tax rules that govern the correct year to report income and deductions can be complex and you should be sure to coordinate your strategy with your certified public accountant (CPA) well in advance of year end,” Navani says. Within those rules, if your company operates on a cash basis for tax purposes, and one of the following applies:

• If you’ve had an especially strong year, and you expect your profits to be high this year, consider if you may be able to defer revenue recognition to the following year (depending on when you receive cash payment), and increase this year’s expenses by paying some of the following year’s costs in advance, subject to certain limitations, Navani advises.
• If your profits seem likely to be lower this year, think about accelerating cash collection before December 31, if possible, and delaying paying expenses until after the following year, if feasible. Income you realize this year may be taxed at a lower marginal income tax rate – and deductions may be more valuable if your income is higher in the following year. “If you expect a net operating loss this year, keep in mind that you may be able to carry that loss forward to offset certain income in future years, subject to limitations, and potentially lower your taxes then," 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. “If you’re a sole proprietor, partnership or S corporation, you 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. Make gifts to your 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). You may want to start evaluating how to transfer some of your wealth to beneficiaries before the expiration of the higher exemptions. “These are time-consuming decisions,” Navani says. “If you wait until the second half of 2025, you may not give yourself enough time, and estate lawyers and CPAs will likely be inundated with requests for help.” Depending on your children’s ages, your vision for the business, and other factors, you have plenty of options, Navani adds. For example, gifting non-voting shares to younger beneficiaries could move assets out of your estate now, without giving children management authority before they’re ready. Yet enacting such decisions takes time, he cautions. Speak with your tax advisor soon about which approaches might make sense for your business and family.

3. Understand the tax consequences of your 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 the potential tax consequences, Navani cautions. “Make sure you're compliant with all the payroll tax and state filing obligations,” he suggests, even if you relocate within the United States. If you relocate 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. Your tax advisor should be consulted with respect to each jurisdiction’s obligations.

4. Determine whether your 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). However, certain service businesses, such as legal, medical or accounting practices generally may not take advantage of such deductions. Your tax advisor can help you understand which tax laws and deductions apply to your business.

5. Create a smart plan for paying taxes

The sooner you have an idea of your business’s general outlook for the tax year, the better prepared you 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 you may want to think about if you qualify: estimated taxes are typically based on the prior year, so if you had a down year, you may be able to pay a relatively low amount of estimated tax for this year to preserve cash flow. 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 your adjusted gross income for the previous year was $150,000, or $75,000 if you’re 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 filing deadline in 2025. You can work with your accountant to estimate the tax due, so you can invest the difference and be potentially better prepared for the eventual payment.

6. See whether pass-through entity status could help reduce your 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 often neutral with respect to state taxes. “Since 2017, more and more states have adopted these provisions,” Navani says. “If you’re an S corporation or LLC, be sure to speak with your tax advisor about your 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 your company more attractive to employees while enabling you to save money for yourself.” 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. Individuals may also set up personal IRA accounts for themselves.

With any plan, contributions you make for yourself and your 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, you generally have 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. Ask your tax advisor. To learn how much you can contribute to your retirement plan, refer to our annual contribution limits guide.

8. Consider equipment deductions and green energy tax credits

If you buy new or used equipment for your company and place it in service before December 31, 2024, you could be entitled 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 you’ve had a challenging year financially and envision better results in the year to come, you might consider holding off that purchase until the start of the tax year, giving yourself a potential deduction for the next tax year, when your tax bill could be higher.”

If you’ve already reached the Section 179 limits described above, you may be able to claim other incentives 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 you’re on the fence about buying 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 think about green improvements for your 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 your tax advisor on which credits might be available to you. You might also check whether your state offers any clean energy incentives, Navani suggests.