Small Business Tax Strategies
Pick the right entity, stack the big deductions, and use retirement plans and year-end timing to cut taxes.
TL;DR
- Choose an
entitythat fits your profit to cut self-employment tax. - Stack
Section179, bonus depreciation, and the 20%QBIdeduction. - Shelter profit in a
solo401kor SEP-IRA before year-end.
Choose Your Entity
Sole Prop / LLCSimplest setup, but SE tax hits all net income.
15.3% on all profitS CorporationSplit pay into salary and distributions to save SE tax.
SE tax on salary onlyReasonable SalaryThe S-corp owner must be paid fairly first.
IRS challenges lowball payC CorporationFlat 21% rate, but dividends are taxed again.
21% corporate + dividend taxStack the Deductions
Section 179Expense equipment in full the year you buy it.
Up to $2,560,000 in 2026Bonus DepreciationDeduct 100% of eligible assets, even into a loss.
100% in 2026, permanentQBI DeductionTake up to 20% of pass-through business income.
Up to 20% under Section 199AHome Office and AutoDeduct a work-only space and business miles.
$5/sq ft; 76 cents/mileRetirement Plans
Solo 401(k)Big limits for an owner with no employees.
Up to $72,000 in 2026SEP-IRASimple plan funded by the business.
Up to 25% of pay or $72,000SIMPLE IRALower-cost plan for a small team.
$17,000 employee in 2026Fund LateMost plans accept contributions until you file.
Until the filing deadlineYear-End Moves
Defer IncomeBill late so cash-basis income falls next year.
Invoice in late DecemberAccelerate ExpensesPrepay deductible costs before December 31.
Rent, supplies, subscriptionsTime Big BuysPlace equipment in service before year-end.
In service by Dec 31Hire FamilyPay family for real work to shift income.
Child under 18: no FICATips
- Meet your CPA in the fall, not April, so there is still time to act on an
Scorpelection, a big purchase, or a retirement contribution. - Put your spouse or kids on payroll for real work; wages are deductible and a child under 18 in your unincorporated business owes no
FICA.
Warnings
- An
Scorponly saves tax if you pay yourself a reasonable salary first, since the IRS challenges owners who lowball their pay. - Commingling business and personal money is a top audit trigger, so keep separate
accountsand clean books all year.
In Practice
See how a retirement plan turns taxable profit into tax-deferred savings.
Your business nets $120,000, you are 45 and in the 24% bracket, and you open a solo 401(k).
- Employee contribution: up to $24,500.
- Employer contribution: about 20% of net profit, roughly $22,000.
- Total sheltered: about $46,500, under the $72,000 cap.
- Tax saved this year: $46,500 x 24% = about $11,160.
The solo 401(k) shelters about $46,500 and saves roughly $11,160.
Retirement plans are the biggest tax lever a profitable small business has.
FAQ
Your entity decides how profit is taxed and how much self-employment tax you owe. A sole proprietorship or single-member LLC pays SE tax on all net income. An S corporation lets you split income into salary, which owes payroll tax, and distributions, which do not. A C corporation pays a flat 21% corporate rate but faces a second layer of tax on dividends.
It can cut self-employment tax, because only your salary, not your distributions, owes the 15.3%. But you must pay yourself a reasonable salary first, and the added payroll and paperwork have real costs. The math usually works once profits are consistently high, often past roughly $40,000 to $50,000 above a reasonable salary.
Section 179 and 100% bonus depreciation let you expense equipment in the year you buy it. The 20% qualified business income deduction cuts pass-through income. Add the home office deduction, business use of a vehicle, health insurance premiums, and retirement contributions, and you can shave a large share off taxable income.
If you use cash-basis accounting, defer income by invoicing in late December for January payment, and accelerate deductions by prepaying expenses before December 31. Then max out a retirement plan like a solo 401(k) or SEP-IRA, which reduces taxable income dollar for dollar, up to the filing deadline.