Being a small business owner can be expensive. And it can be even more expensive if you end up paying more than you owe in taxes at the end of the year.
That’s why one key tax tip for small businesses is to hire a trustworthy, skilled accountant to assist you with your taxes. A certified public account (CPA) or tax advisor can help make sure you don’t miss out on any credits and deductions you’re entitled to, and also help you manage your business finances throughout the year.
Below are five other smart tax moves for small business owners that can help minimize your tax liability this year — and beyond.
Key Points
• Hire a skilled accountant to ensure you don’t miss out on credits and deductions and manage finances effectively.
• Properly classify your business to avoid unnecessary tax payments.
• Research and utilize all available business tax credits to reduce your tax bill.
• Know which expenses are deductible, such as home office, business vehicle, and travel expenses.
• Deduct interest on business loans and consider setting up a retirement savings plan for your employees to lower your tax liability.
What Are Some Business Tax Saving Tips?
Going through each of the small business tax tips below can help you avoid overpaying when it comes time to file.
1. Properly Classifying Your Business
One of the most common small business mistakes is not classifying your business properly. This can lead to paying higher taxes than necessary.
Most small businesses are structured as pass-through businesses, meaning all money made flows through the owners and is then taxed as personal income. This includes: sole-proprietorships, S-corporations, limited liability companies, and partnerships.
C-corporations’ profits, on the other hand, are subject to corporate income tax. While the corporate tax isn’t as high as it used to be (now 21%), it’s added to all business income before it gets passed on to owners, called shareholders. When profits are distributed to owners, they are taxed again as personal income. This is something you’ll want to consider when choosing your business structure.
Recommended: How Much Can a Small Business Make Before Paying Taxes?
2. Researching Tax Credits
Tax credits are valuable because they reduce your tax bill dollar for dollar. In other words, a $1,000 tax credit saves you $1,000 in taxes. Since these credits tend to come and go, it can be a good idea to stay on top of which ones are currently active by checking the IRS’s business tax credits page.
Some business tax credits you may be able to take advantage of include:
• Disabled Access Credit: Companies that make their business more accessible to customers with disabilities may receive a tax credit for any year they have any expenditures related to providing disabled access points.
• Research and Development (R&D) Credit: If your company is engaged in any R&D for a new product or manufacturing process, or for improving a product’s quality, then you may qualify for this business tax credit.
• Work Opportunity Tax Credit (WOTC): This tax credit rewards employers for hiring people who have consistently faced barriers to employment. If you employ veterans, ex-felons, or anyone that is on the IRS’s list of targeted groups, you may be able to receive a tax credit for a portion of that employee’s wages. The WOTC program is set to expire on December 31, 2025.
• Clean Vehicle Tax Credit: If your businesses purchased a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) in 2023 or after, you may qualify for a tax credit of up to $7,500.
• Empowerment Zone Employment Credit: This credit offers a significant tax benefit to companies that hire and retain employees living within empowerment zones, or distressed areas. Eligible businesses can receive a wage credit of up to $3,000 per year for each qualified zone employee. This credit is set to expire on December 31, 2025.
Recommended: Business Fundamentals
3. Knowing Which Expenses are Deductible
As a small business, many of your expenses are deductible, which means they can be used to lower your taxable income. To be deductible, however, a business expense must be both ordinary (meaning common in your industry) and necessary, according to the IRS. Here are a few you may be able to take advantage of.
• Home office deduction: If you run a small business from home, and it’s your principal place of business, you may be able to deduct a portion of your home ownership or rental expenses. For this deduction to work, the home office needs to be used regularly and exclusively for the business.
• Business vehicle deduction: If your car is 100% used for business, you may be able to deduct the entire cost of ownership and operation (within limits). If you use the car for both personal and business purposes, you may only deduct the cost related to business use.
• Business meals: As a small business, you can deduct 50% of food and drink purchases that are related to your business for 2024. Most entertainment expenses are not deductible. However, food you supply for employee events, such as holiday parties and team-building events are generally 100% deductible.
• Work-related travel expenses: You may be able to deduct all expenses related to business travel if the trip took you away from home and was necessary for your business. This can include airfare, hotels, rental car expenses, tips, dry cleaning, meals, and more.
• The qualified business income deduction: The qualified business income (QBI) deduction enables small business owners and those who are self-employed to deduct up to 20% of their qualified business income on their taxes. To qualify, your total 2024 taxable income must be $191,950 or less for single filers and $383,900 or less for joint filers. This deduction is set to expire on December 31, 2025.
• Education expenses: Any expenses related to professional education and training — including courses, seminars, conferences, trade publications, and books — are generally tax deductible. This may also include the cost of certifications, degrees, licenses, or other professional requirements that are necessary for operating your business.
Recommended: How to Start a Nonprofit
4. Understanding How Your Loans Are Taxed
If you’ve taken out a small business loan from a true lender (meaning not a family member or friend), then you will likely be able to deduct the interest you pay on that loan. This small business tax tip generally applies to any type of business loan on the market, including:
• Short-term loans: Because short-term loans are typically taken out and paid back within the same calendar year, deducting the interest you paid is typically straightforward. If the loan bleeds into a new calendar year, then you may have to calculate how much interest was paid in one year, and how much was paid in the next.
• Personal loans: If you used a personal loan to pay for business expenses (note that not all lenders allow this), you can generally deduct all interest for the amount of the loan that was used for your company. For example, if you used half of the loan to help with your business but the other half to pay for a vacation, then you could only deduct half of the interest from the personal loan. The amount you deduct must be proportional to what you used for your small business.
• Business lines of credit: A business line of credit is like a credit card in that you take out only what you need when you need it. It’s also like a credit card in that you only pay interest on the amount you use. Fortunately, any interest you pay on a business line of credit is tax typically deductible.
• Term loans: Term loans are often paid for over a number of years, so to calculate how much interest you pay in a given year you will likely have to review your amortization schedule. The amount of interest you pay in a given year may be tax deductible.
5. Setting Up (or Adding to) a Retirement Savings Plan
Offering a retirement plan can help attract employees, while also netting some tax savings for yourself. Options for employer-sponsored retirement savings plans include SIMPLE IRAs, SEP IRAs, and 401(k)s. With any of these plans, contributions you make for yourself and your employees may be tax-deductible. In addition, eligible small business owners may be able to claim a tax credit of up to $5,000, for three years, to help cover the costs of starting an employee retirement plan.
The Takeaway
If you’re a small business owner, there are many opportunities to lower your tax bill each year. Understanding the various tax tips for small businesses can help you avoid overpaying come tax time, and also help guide your business decisions throughout the year.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How to pay less taxes as a small business owner?
To reduce taxes, you’ll want to take advantage of all available deductions, including business expenses (e.g., office supplies, travel, and equipment), as well as the qualified business income deduction (or Section 199A deduction). Another way to pay less taxes is to explore business tax credits like those for hiring employees or sustainability initiatives. Contributing to retirement accounts like a SEP IRA or solo 401(k) can also help lower taxable income and lower your business taxes.
What are the biggest tax mistakes business owners make?
Common tax mistakes include failing to track expenses accurately, missing deadlines, and not making quarterly estimated tax payments, leading to penalties. Many business owners also neglect to separate personal and business finances, which complicates record-keeping and tax-filing. Overlooking available deductions and tax credits, such as home office expenses or depreciation, is another costly error.
How much should I save for taxes as a small business owner?
As a small business owner, it’s a good idea to set aside 30% to 40% of your net income per year to cover your quarterly federal tax installments. This estimate covers federal, state, and self-employment taxes, which include Social Security and Medicare contributions. To determine what that looks like, you’ll need to calculate your expected gross income and subtract applicable deductions. Paying quarterly estimated taxes can help you avoid underpayment penalties.
Photo credit: iStock/paulaphoto
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOSMB-Q424-065