Small Business Tax Strategies
Covers entity structure, deductions, credits, and year-end tactics to reduce small business taxes in 2026.
TL;DR
- 01Choose the right entity structure to minimize self-employment and income taxes.
- 02Deduct up to $2,560,000 in equipment using Section 179 expensing.
- 03Contribute to a Solo 401(k) or SEP IRA to cut taxable income.
Tips
- 01Schedule a tax planning meeting with your CPA in the fall, before year-end, so there is still time to act on recommendations.
- 02Hire family members for legitimate work, since wages paid to a spouse or child are deductible and build their earned income.
Warnings
- 01The QBI deduction phases out for service businesses above certain income thresholds, so confirm your business type before counting on the full 20%.
- 02Mixing personal and business expenses is one of the most common audit triggers for small businesses, so keep accounts and credit cards separate.
Choosing the Right Entity
Your business structure determines how profits are taxed and what deductions are available.
| Entity Type | Tax Treatment | SE Tax on Owner? | Key Advantage |
|---|---|---|---|
| Sole Proprietorship | Pass-through (Schedule C) | Yes, on all net income | Simplest to set up |
| Single-Member LLC | Pass-through (Schedule C) | Yes, on all net income | Liability protection |
| S Corporation | Pass-through; salary split | Only on salary portion | Reduces SE tax on distributions |
| Partnership / Multi-Member LLC | Pass-through (Form 1065) | Yes, on active income | Flexible profit allocation |
| C Corporation | 21% flat corporate rate | No | Retains profits at lower rate |
S Corp strategy: Pay yourself a reasonable salary, then take remaining profits as distributions. Distributions are not subject to the 15.3% SE tax. The IRS scrutinizes low salaries, so reasonable compensation is essential.
Top Deductions for Small Businesses
- Section 179 expensing: Deduct the full cost of qualifying equipment and software in the year of purchase, up to $2,560,000 in 2026 (phase-out begins at $4,090,000).
- Bonus depreciation: Deduct 100% of eligible asset costs in 2026, after the One Big Beautiful Bill Act made full bonus depreciation permanent for qualifying property placed in service after January 19, 2025.
- Home office deduction: Deduct $5 per square foot (up to 300 sq. ft.) using the simplified method, or calculate actual expenses for a larger deduction.
- Vehicle expenses: Use the standard mileage rate or deduct actual costs for business-use vehicles. Check IRS.gov for the 2026 rate.
- Qualified Business Income (QBI) deduction: Deduct up to 20% of qualified business income under Section 199A. Income limits and service-business restrictions apply.
- Business meals: Deduct 50% of meals with a business purpose. Keep documentation of who attended and the business topic discussed.
- Health insurance premiums: Self-employed owners can deduct 100% of premiums for themselves and their families.
Tax Credits Worth Claiming
- R&D Tax Credit (Section 41): Available for businesses investing in qualified research activities. Can offset income tax or, for small businesses, payroll tax.
- Work Opportunity Tax Credit (WOTC): Credit of up to $9,600 per qualifying hire from targeted groups such as veterans or long-term unemployed individuals.
- Small Business Health Care Tax Credit: Available to businesses with fewer than 25 employees paying at least 50% of employee premiums. Maximum credit is 50% of premiums paid.
- Energy efficiency credits: The Inflation Reduction Act expanded credits for energy-efficient improvements to commercial buildings and clean vehicles.
- Retirement plan startup credit: New retirement plans can receive a credit of up to $5,000 per year for three years to offset setup and administration costs.
Retirement Planning Strategies
Retirement contributions reduce taxable income dollar for dollar and build long-term wealth.
| Plan | 2026 Contribution Limit | Who Can Use It |
|---|---|---|
| Solo 401(k) | $72,000 ($80,000 with catch-up if 50+) | Self-employed with no full-time employees |
| SEP IRA | Lesser of 25% of compensation or $72,000 | Sole proprietors, partnerships, S corps |
| SIMPLE IRA | $17,000 employee; employer match required | Businesses with 100 or fewer employees |
| Defined Benefit Plan | Varies; can exceed $280,000/year | High-income owners seeking large deductions |
Contributions to these plans can be made up to the tax filing deadline (plus extensions) for the prior tax year.
Year-End Tax Tactics
- Defer income: If cash-basis, delay sending invoices until late December so payment arrives in the next tax year.
- Accelerate expenses: Prepay deductible expenses such as rent, subscriptions, or supplies before December 31.
- Review depreciation elections: Decide whether to use Section 179, bonus depreciation, or standard MACRS depreciation for assets purchased during the year.
- Harvest business losses: If you have losing investments or receivables that are uncollectable, recognize them before year-end.
- Check payroll tax compliance: Ensure all payroll taxes are deposited on time to avoid trust fund penalties, which apply to owners personally.
- Hire family members: Wages paid to a spouse or children for legitimate work are deductible. Children under 18 working for a parent's unincorporated business owe no FICA.
FAQ
Your business structure determines how profits are taxed and what deductions are available. Choosing between a sole proprietorship, S corporation, or other entity type directly affects how much self-employment tax you owe.
Deduct up to $2,560,000 in equipment costs using the Section 179 expensing election, after the One Big Beautiful Bill Act raised the limit for 2026. This lets you write off the full cost of qualifying equipment and software in the year you buy it, instead of depreciating it over several years.
An S corporation can reduce self-employment tax because only your salary, not your distributions, is subject to the 15.3% SE tax. The IRS requires you to pay yourself a reasonable salary first, so this strategy works best once your profits are large enough to justify the added payroll complexity.
Accelerate deductible expenses like rent, subscriptions, or supplies before December 31, and consider deferring income if you use cash-basis accounting. Maximizing retirement plan contributions, such as a Solo 401(k) or SEP IRA, also reduces taxable income dollar for dollar.