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Effective tax strategies that small business owners can use to maximize deductions and optimize tax savings.
1. Section 179 Expensing – Immediate Deduction of Asset Purchases
Tax Code: IRC § 179
Overview: Under Section 179, small businesses can immediately deduct the cost of qualifying assets, such as equipment, software, and machinery, up to a certain limit rather than depreciating over multiple years. For 2024, the deduction limit is $1,160,000, with a phaseout threshold starting at $2,890,000.
Benefit: Accelerates tax savings by allowing larger deductions in the purchase year, which can help cash flow.
2. Bonus Depreciation – Accelerated Write-
Offs for New or Used Property
Tax Code: IRC § 168(k)
Overview: Businesses can deduct 80% of the cost of qualifying new or used property in the first year it’s in service (as of 2023, with a planned phaseout). This applies to tangible property, like machinery and computers.
Benefit: Reduces taxable income significantly in the first year, offering immediate savings on substantial investments.
3. Qualified Business Income (QBI) Deduction – 20% Deduction for Pass-Through Income
Tax Code: IRC § 199A
Overview: Small business owners with passthrough entities (e.g., sole proprietorships, partnerships, S-Corps) may qualify for a 20% deduction on QBI. The deduction phases out for higher earners, especially in specified service trades or businesses.
Benefit: Allows eligible business owners to reduce their taxable income by up to 20% of their QBI.
4. Retirement Plan Contributions – Tax Deferred Savings for Owners and Employees
Tax Code: IRC § 401(k), § 408(k) (SEP), and § 408(p) (SIMPLE IRA)
Overview: Contributions to retirement plans like SEP IRAs, SIMPLE IRAs, or 401(k) plans are deductible. Small businesses can even set up solo 401(k)s, allowing the owner to contribute both as an employer and employee.
Benefit: Offers tax-deferred growth while lowering current taxable income for both the owner and employees.
6. Home Office Deduction – Deducting Home Based Business Expenses
Tax Code: IRC § 280A
Overview: If a small business owner uses a portion of their home exclusively for business, they can deduct a portion of expenses like mortgage interest, rent, utilities, and depreciation. Simplified options allow deductions based on a set rate per square foot.
Benefit: Reduces taxable income based on the percentage of the home used for business, lowering costs for home-based entrepreneurs.
7. Family Employment Strategy – Hiring Family Members to Lower Income Tax
Tax Code: IRC § 3121(b)(3)(A)
Overview: Small business owners can hire family members, potentially shifting income to family members in lower tax brackets. Wages paid to children under 18 are exempt from FICA taxes in sole proprietorships.
Benefit: Can be used to shift income from the owner’s higher bracket to a lower bracket, reducing the family’s total tax liability.
8. Business Meal Deduction – Deducting 50% of Business Related Meals
Tax Code: IRC § 274(n)
Overview: Businesses can deduct 50% of business related meals if they are directly associated with business activities (e.g., client meetings). Meals provided on the employer’s premises can be 100% deductible if they’re for employee convenience.
Benefit: Lowers taxable income for business related meal expenses, providing some relief on client engagement costs.
9. S Corporation Election – Potential Self-Employment Tax Savings
Tax Code: IRC § 13611379
Overview: Small business owners can elect to treat their LLC or corporation as an S Corporation, allowing owners to pay themselves a "reasonable salary" and avoid self-employment taxes on distributions beyond that salary.
Benefit: Can reduce self-employment tax liabilities, as only the salary portion is subject to payroll taxes, while distributions are exempt.
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