Top 5 Strategies to Reduce Taxes as a Business Owner

As a business owner, you’ve probably put in a lot of effort to start, grow, or sustain your business. So it’s no wonder you want to maximize your bottom line and use whatever strategies might be available to reduce your taxes.

Understanding some of the top tax strategies for business owners can help alleviate the stress associated with filing taxes and make it easier to reduce your taxable income and improve cash flow.

This article provides an overview of various tax-reduction strategies available to business owners in 2024. 

We’ll cover key tax deductions, tax credits, the Qualified Business Income deduction, structuring your business for maximum tax efficiency, retirement planning, a nd other essential tax planning tips to help you reduce taxes on the personal and the business side.

Strategy #1:
Key Tax Deductions Every Business Owner Should Know

If you’re seeking the best strategies to reduce taxes as a business owner, the first place to look is deductions. These can help reduce taxable income for high earners by deducting allowable expenses from your income.

As a business owner, you can write off many expenses related to starting or running your business. Here’s a closer look at some of the most common ones:

  • Deduct Office Expenses

Every business incurs office expenses, whether you operate from a dedicated office space or work from home. Common deductions include:

  • Rent or lease payments: If you lease office space, the rent is fully deductible.
  • Utilities: This includes electricity, water, and internet services.
  • Supplies and equipment: Office supplies like paper, pens, computers, and software purchases can all be deducted.

  • Deduct Travel Expenses

If your business requires travel, you can deduct many travel-related expenses, including:

  • Airfare and transportation: Deduct the cost of flights, car rentals, and public transportation.
  • Lodging: Hotel expenses for business-related stays are deductible.
  • Meals: You may be able to deduct 50% of business meal expenses. Make sure to keep records, including the purpose of the meal and attendees.

  • Home Office Deduction

For those operating from home, the home office deduction allows you to deduct a portion of your home expenses related to your business. You can choose between two methods:

  • Simplified method: Deduct $5 per square foot of your home office, up to a maximum of 300 square feet.
  • Regular method: Calculate actual expenses, including mortgage interest, insurance, utilities, and depreciation, based on the percentage of your home used for business.

Additionally, you can deduct expenses for equipment, software, and other necessary business purchases.

Just remember to keep thorough records to make it easier to add everything up at the end of the year while ensuring IRS compliance.

  • The QBI Deduction

If your business is a pass-through entity, like an S-corp, LLC, or sole proprietorship, you can deduct up to 20% of your qualified business income with the Qualified Business Income (QBI) deduction.

Let’s say your business earns $100,000 in qualified income this year. With the QBI deduction, you could deduct up to $20,000 from your income, lowering your taxable amount.

So, what counts as qualified income? Income from your business operations, which includes revenue from sales, services provided, and other typical business activities.

Certain types of income, however, do not qualify for the deduction. These are exclusions from QBI:

  • Investment income: Capital gains, dividends, and interest income.
  • Income from a business that is considered a specified service trade or business (SSTB). SSTBs include businesses in fields like health, law, accounting, consulting, financial services, and performing arts. For these businesses, the QBI deduction may be limited or phased out depending on the taxpayer’s income.
  • W-2 wages and capital investment: For higher-income taxpayers, the QBI deduction can be subject to a wage and capital investment limitation.

2024 QBI Deduction Limits

To qualify for the QBI, your taxable income needs to be below a certain threshold. In 2024, this threshold is $383,900 for married couples and $191,950 for all other filing statuses. Above these amounts, limitations may apply based on the type of business.

Strategy #2:
Tax Credits: An Overlooked Resource for Small Businesses

One of the most overlooked ways to reduce taxes as a business owner is using tax credits available to your business. 

It’s easy to mix up deductions and credits, so here’s the difference: a tax credit reduces the actual amount of tax you owe, while a business tax deduction lowers your taxable income. 

If you take a $1,000 deduction in your business, your net profit is reduced by $1,000. But if you qualify for a $1,000 tax credit, your tax bill is reduced by $1,000.

Here are some notable tax credits to consider as a business owner:

  • 1. Research and Development (R&D) Credit: This credit encourages businesses to invest in innovation. If your company develops new products or improves existing ones, you might qualify for this credit.
  • 2. Work Opportunity Tax Credit (WOTC): This incentive rewards employers for hiring individuals from certain target groups facing employment barriers such as veterans or long-term unemployed workers.
  • 3. SECURE 2.0 Act: This act offers credits to help business owners save money on taxes by providing a variety of tax incentives designed to encourage retirement savings, improve employee benefits, and enhance long-term financial planning. 

Not sure if you’re eligible for these credits? Consult with a tax professional to determine which credits your business may qualify for.

Strategy #3:
Structure Your Business for Maximum Tax Efficiency

The structure of your business—whether it's a sole proprietorship, LLC, S corporation, or C corporation—affects your tax obligations and potential savings. Each structure has its own tax implications, so it’s essential to choose wisely based on your goals.

Common Business Structures and their Tax Implications

Here's a breakdown of the common structures and some key benefits of S corporations:

  • Sole Proprietorship: Simple to set up and manage, but offers no liability protection and all income is subject to self-employment taxes.
  • LLC: Provides liability protection and flexible tax options (can be taxed as a sole proprietorship, partnership, or S corporation).
  • S Corporation: Offers pass-through taxation and the ability to pay yourself a salary plus distributions, potentially reducing self-employment taxes.
  • C Corporation: A separate tax entity that offers the strongest liability protection, but subject to double taxation (corporate level and dividend taxes).

As your business grows, it’s helpful to periodically reevaluate your business structure. Changes in income, growth, or long-term goals may warrant a shift in your business entity. 

Strategy #4:
Retirement Plans and Health Savings Accounts as Tax-Saving Strategies for Business Owners

Retirement Plan Contributions

Contributing to retirement plans such as SEP IRAs, SIMPLE IRAs, or solo 401(k) plans can be another effective way to reduce your taxable income.

Contributions to these retirement plans are made with pre-tax dollars which lowers your taxable income for the current year, meaning you pay less in taxes now.

Once the money is in your retirement account, any investment earnings are not taxed as long as they remain in the account. This allows your money to compound and grow faster than it would in a taxable account.

When you finally withdraw the money in retirement, you'll pay taxes on the distributions. At that time however, it’s possible that you may be in a lower tax bracket, maximizing the benefit of your contributions.

Here’s an overview of some of the major retirement plan account types for business owners:

1. SEP IRA

  • For: Self-employed individuals or small business owners.
  • Contributions: Up to 25% of income, max $69,000 (2024). (Source: IRS.gov)
  • Pros: High contribution limits, easy setup, no employee participation required.
  • Cons: Only employer contributions, fluctuates with income.

2. SIMPLE IRA

  • For: Small businesses with 100 or fewer employees.
  • Contributions: Employees can contribute up to $16,000 ($19,500 if 50+) in 2024, plus employer match (up to 3% of compensation). (Source: IRS.gov)
  • Pros: Low admin costs, employee participation encouraged.
  • Cons: Lower contribution limits, mandatory employer contributions.

3. Solo 401(k)

  • For: Self-employed individuals or business owners with no employees (except a spouse).
  • Contributions: Up to $23,000 ($30,000 if 50+), plus 25% of net income, max $69,000 as of 2024. (Source: IRS.gov)
  • Pros: High contribution limits, both employee and employer contributions, spouse can contribute.
  • Cons: Requires more admin if assets exceed $250,000, no employees allowed (except spouse).

4. Traditional IRA

  • For: Anyone with earned income.
  • Contributions: Up to $7,000 ($8,000 if 50+), subject to income limits if covered by another plan. (Source: IRS.gov)
  • Pros: Simple to set up, tax-deferred growth.
  • Cons: Lower contribution limits, income restrictions for tax deductions.

Health Savings Accounts (HSAs)

HSAs are another valuable tax-efficient tool. Contributions to HSAs are tax-deductible, and withdrawals for qualified medical expenses are tax-free. If you offer a high-deductible health plan (HDHP) in your business, consider implementing HSAs to benefit both your business and employees.

You can contribute up to $4,150 in 2024 if you have self-only HDHP coverage. For family HDHP coverage, the contribution limit is $8,300. (Source: IRS.gov)

Strategy #5: Minimize Taxes by Planning Ahead and Automating What You Can

One of the best strategies for minimizing taxes is year-round planning. Don’t wait until tax season to consider your tax situation. Here are some key tips:

  • Quarterly tax payments: Ensure you’re making estimated tax payments throughout the year to avoid underpayment penalties.
  • Maintain accurate records: Keep thorough records of all income and expenses to streamline the filing process.

To simplify tax planning, consider implementing automated systems for tracking income and expenses. Use accounting software to manage finances, ensuring you’re consistently monitoring your financial situation.

Consider hiring a tax professional or CPA specializing in small businesses. They can provide personalized strategies, help you navigate complex tax laws, and assist in identifying opportunities for deductions and credits you might have overlooked.

Build Your Business into Your Financial Plan

From leveraging tax deductions and credits to choosing the right business structure and planning effectively, there are many ways to reduce taxes as a business owner. 

Remember, proactive planning while utilizing the appropriate strategies above is key to maintaining tax savings year after year. 

In addition to speaking with a tax advisor to optimize your tax situation, it may also be a good idea to speak with a financial advisor about integrating your business goals with your personal and retirement goals. To speak with our expert financial advisors in Tampa, FL, who serve business owners nationwide, get in touch here.