Top 11 Ways to Reduce the Tax Burden of Your Small Business
There are several strategies to reduce your small business's tax burden and keep more of your hard-earned income. Applying them can effectively lower your company's tax liability while staying compliant with federal and state laws.
1. Maximize Tax Deductions
Federal income tax deductions directly reduce your business's taxable income, lowering the amount you owe when paying income tax. Common deductible expenses include office supplies, utilities, travel, marketing, materials, insurance, and professional services.
Keep accurate records—such as saving receipts and maintaining organized books—to meet IRS documentation requirements. Consulting with a tax professional will also help you identify expense tax categories specific to your business.
Schedule a discovery call with our tax professionals to learn how our team can save your small business money with strategic tax deductions.
2. Take the Home Office Deduction
Small business owners can deduct part of their home office expenses—such as mortgage interest (or rent), utilities, repairs, and insurance—if the space is used exclusively for business.
This deduction offers two methods:
The simplified method offers a flat-rate deduction per square foot (up to 300 square feet) and is often easier for small businesses.
The regular method calculates actual expenses and can yield a larger deduction for bigger spaces or higher costs.
3. Utilize Federal Tax Credits
Federal income tax credits directly reduce the amount of tax you owe, offering dollar-for-dollar savings. These are examples of available tax credits:
Work Opportunity Tax Credit (WOTC) rewards businesses for hiring individuals from targeted groups facing barriers to employment.
R&D Tax Credit offers savings to companies investing in innovation or process improvements.
Small Business Health Care Tax Credit helps cover the cost of providing employee health insurance if you have under 25 employees and meet wage requirements.
Disabled Access Credit provides up to $5,000 (50% of eligible expenses up to $10,250) to small businesses that improve accessibility for employees or customers with disabilities.
4. State-Level Tax Credits
Small businesses should also be aware of state-specific incentives that can further reduce their tax liabilities.
For example, these are two valuable tax credits available in Florida:
The Rural Job Tax Credit provides eligible businesses located within designated rural counties a tax credit ranging from $1,000 to $1,500 per qualified employee.
The Experiential Learning Tax Credit Program incentivizes businesses to employ apprentices, pre-apprentices, and student interns, offering a $2,000 credit per eligible individual, up to $10,000 annually.
Ensure you're maximizing every credit available—federal and state—by consulting with a tax expert to avoid leaving potential savings on the table.
5. Consider Your Business Structure
Your business structure—whether a sole proprietorship, partnership, limited liability company, S corporation, or C corporation—directly impacts your tax obligations and liability. Some business structures offer pass-through taxation. This means that profits do not incur corporate income tax and are only taxed at the individual level on your personal income tax return.
Restructuring can provide additional benefits, such as personal liability protection or simplifying tax payments through income withholding. As your business grows, periodically reassessing your structure can lead to significant tax savings and improved financial flexibility.
6. Optimize Depreciation Deductions
The IRS offers the following methods to accelerate the depreciation of newly acquired assets.
Section 179 Deduction
Businesses can expense up to $1,250,000 of qualifying property in 2025. This applies to assets like machinery, office equipment, computers, and certain business vehicles. Deductions cannot exceed taxable income but can carry forward to future years.
Example: A business purchases equipment for $100,000 and uses Section 179 to deduct the full amount in 2025. If the business has a 25% tax rate, this results in $25,000 tax savings for that year.
Bonus Depreciation
Bonus depreciation allows businesses to deduct 40% of an asset’s cost in 2025. This applies to new or used property with a recovery period of 20 years or less, specific software, and improvements. Bonus depreciation can create a net operating loss for future use.
Example: For the same $100,000 equipment purchase:
$40,000 is deducted upfront using bonus depreciation.
The remaining $60,000 is depreciated over 5 years, with $12,000 deducted annually.
Strategic Considerations: Plan asset purchases based on expected income. If higher earnings are likely in future years, spreading deductions with bonus depreciation may offer greater long-term benefits. If immediate savings are needed, Section 179’s full deduction upfront lowers your current tax bill.
7. Contribute to Employee Retirement Plans
Contributions to employee retirement plans—Simplified Employee Pension (SEP) IRAs, SIMPLE IRAs, or 401(k) plans—are tax-deductible. Retirement plans offer immediate tax benefits by lowering your company's taxable income while also helping you attract and retain employees.
Business owners can contribute up to 25% of an employee’s salary to a SEP IRA, with a maximum contribution of $70,000 for 2025. Solo 401(k) plans allow self-employed individuals to contribute both as employer and employee, offering even higher savings potential.
You may also qualify for the Credit for Small Employer Pension Plan Startup Costs—up to $500 per year for the first three years—when setting up a new retirement plan.
8. Hire Family Members
Employing family members can lower your business's taxable income since their wages are deductible business expenses. Hiring your under-18 child to work for your sole proprietorship or partnership (where both partners are the child's parents) exempts them from paying federal employment taxes: social security, Medicare, and FUTA.
You can also offer tax-deductible benefits like health insurance, retirement contributions, and education assistance to family employees. These benefits reduce your business's taxable income while providing valuable tax-free perks for your family. Ensure all work is documented and wages align with labor laws to stay IRS-compliant.
9. Deferring and Accelerating Income and Expenses
Strategically managing when you recognize income and expenses can help lower your tax bill. If you expect to be in a lower tax bracket next year, deferring income until then reduces your current tax liability. On the other hand, if higher earnings are likely, accelerating income now can help you lock in a lower tax rate.
You can also accelerate expenses by prepaying for services or purchasing equipment before year-end. This tactic works well for businesses with seasonal revenue or fluctuating income.
Tip: Proactive tax planning is key to maximizing this strategy. A tax professional will help you time income and deductions effectively, ensuring you stay compliant while minimizing your tax liability and saving money.
10. Claim the Qualified Business Income (QBI) Deduction
Eligible small businesses can deduct up to 20% of their qualified business income (QBI). This deduction offers significant tax savings for pass-through entities: sole proprietorships, partnerships, single-member LLCs treated as sole proprietorships, LLCs treated as partnerships, and S corporations.
Strategic Considerations: Tax planning can help you maximize this deduction. Adjusting income levels through retirement contributions or leveraging depreciation can lower your company’s taxable income and help keep it within the income limits needed to claim the full QBI deduction.
11. Invest in Green Energy Solutions
The federal Inflation Reduction Act offers significant green energy tax credits for businesses investing in renewable energy solutions, like solar panels, clean vehicles, or energy-efficient equipment. These clean energy tax credits lower your tax bill and lead to long-term energy savings.
For example, eligible solar investments quality for a percentage of installation and equipment costs, helping your business reduce overhead while supporting environmental responsibility.
Maximize Tax Savings for Your Small Business
You can significantly reduce your small business’s tax burden by maximizing deductions, utilizing credits, and making smart investments. A tax professional can help you implement the right strategies to minimize your tax liability and ensure compliance.
Being proactive with tax planning, maintaining accurate records, and adjusting your strategy as needed will help you avoid surprises at tax time. With the right approach, you can reduce your liability and confidently focus on growing your business.
