Guides / Tax Strategies for Business Owners
Tax Planning for Small Business Owners
Tax planning works best as a habit built into how you run the business all year, not a scramble the week before your return is due.
In this guide
Tax planning is a year round job
Many small business owners barely think about taxes until it's time to sit down with their accountant. That habit tends to leave money on the table. Tax planning works best as an ongoing process: reviewing income and expenses monthly and meeting with your CPA or tax advisor quarterly so you can actually take advantage of the credits, deductions, and other breaks you're legally entitled to, while there's still time to act on them.
Effective planning starts with a reasonably accurate estimate of your personal and business income for the next few years. A strategy that saves you money at one income level can cost you money at another, so the better your income projections, the better the odds your planning actually pays off. You're probably already forecasting sales, income, and cash flow for general business purposes; use those same numbers to estimate your likely tax bracket and plan from there.
Tax avoidance versus tax evasion
Tax avoidance, structuring your affairs to legally reduce what you owe, is not just allowed, it's the entire point of tax planning. Tax evasion, reducing what you owe through deceit, fraud, or concealment, is a different matter entirely. What typically separates the two, in the IRS's eyes, is evidence of fraudulent intent. Examiners commonly look for a handful of warning signs:
- Failing to report substantial income, such as unreported dividends or a portion of daily receipts left off the books.
- Claiming fictitious or inflated deductions, like significantly overstated travel expenses or a large charitable deduction with no documentation behind it.
- Accounting irregularities, including inadequate recordkeeping or a mismatch between what's reported on a return and what appears on the company's financial statements.
- Shifting income to a related taxpayer in a lower bracket, such as a corporation distributing income to a controlling shareholder's children.
Good recordkeeping and a straightforward relationship with your tax advisor are the best protection against ever having this question raised about your return in the first place.
What good tax planning is actually trying to do
There are countless individual tax strategies available to small business owners. Some target your personal tax situation, others target the business itself. But nearly all of them are working toward the same handful of overlapping goals:
- Reducing the amount of income that's taxable in the first place
- Lowering the effective rate you pay on that income
- Controlling when tax has to be paid, not just how much
- Claiming every credit and deduction you're legitimately entitled to
- Managing exposure to the Alternative Minimum Tax
- Avoiding the most common, and most costly, planning mistakes
Keeping these goals in mind as you review your numbers each quarter is usually more useful than chasing any single trick or deduction in isolation.
Meal and vehicle deductions worth building into your routine
Business meal expenses remain a legitimate deduction, provided you follow the rules. Business has to actually be discussed before, during, or after the meal, and the setting has to be one where a business conversation makes sense; a quiet restaurant works, a nightclub doesn't. The deduction for food and beverage expenses tied to operating your business currently sits at 50 percent, and that includes employee meals during business travel. Entertainment expenses, by contrast, are no longer deductible at all following the Tax Cuts and Jobs Act.
If you use your car for business, visiting clients or traveling to meetings away from your regular workplace, you can generally deduct those costs using either the standard mileage rate or your actual expenses. The standard mileage rate for 2024 is 67 cents per business mile. If you and your household have two vehicles, using both for business (where business use of each is real) can meaningfully increase your deduction, since business use is calculated by dividing business miles by total miles driven for each vehicle. Whichever method you choose, keep a mileage log and hold onto receipts; that documentation is what actually protects the deduction if it's ever questioned.
Depreciation and Section 179 expensing
Section 179 lets you deduct the cost of qualifying equipment immediately, rather than depreciating it over several years. For 2024, that means you can immediately expense up to $1,220,000 of the first $3,050,000 of qualifying equipment placed in service during the year. The equipment can be new or used and includes certain software; depreciable equipment used in a home office generally qualifies as well. The deduction also covers certain improvements to nonresidential real property, such as roofs, fire protection and alarm systems, security systems, and HVAC systems.
Related guide
If part of your equipment and expenses live in a home office, our guide on The Home Office Deduction walks through exactly what qualifies and how the deduction is calculated.
First year bonus depreciation, which once allowed a full 100 percent immediate deduction for eligible property, is being phased down: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. These are just a few of the deductions available to business owners; a periodic review with a tax professional is the most reliable way to make sure you're capturing all of them.
Frequently asked questions
How often should I actually be doing tax planning, not just tax prep?
Ideally you're reviewing income and expenses monthly and meeting with your CPA or tax advisor quarterly. Planning decisions usually need to happen before year end to matter; by the time your return is being prepared, most of the opportunity to change the outcome has already passed.
What actually separates tax avoidance from tax evasion?
Tax avoidance is legally structuring your affairs to reduce what you owe, and it's fully legitimate. Tax evasion involves deceit, fraud, or concealment, such as unreported income or fabricated deductions. The line usually comes down to whether the IRS can show fraudulent intent.
Can I deduct 100 percent of my business meals?
Generally no. The deduction for food and beverage expenses tied to operating your business sits at 50 percent, including employee meals during business travel. Business entertainment expenses are not deductible at all under current law.
What's the difference between Section 179 expensing and bonus depreciation?
Section 179 lets you immediately deduct the cost of qualifying equipment, up to an annual limit, rather than depreciating it over time. Bonus depreciation is a separate, complementary provision that is currently being phased down year over year, so the percentage you can claim depends on when the property was placed in service.
Do I need to keep a mileage log if I use the standard mileage rate?
Yes. Whether you use the standard mileage rate or actual expenses, the IRS expects contemporaneous records, a mileage log and receipts, to support the deduction. Good documentation is what actually protects the deduction if your return is ever questioned.
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Schedule a consultationThis guide is for general informational purposes only and is not tax, legal, financial, or investment advice. It does not cover every situation or exception that may apply to you. Consult a licensed professional before making decisions based on this information.