Tax-Savings Tips Every Small Business Owner Should Know

Is Your Entity Structure Costing You More Than It Should?

The entity decision gets made once at formation and rarely revisited. For a lot of owners, that is a problem that grows quietly every year.

Sole proprietors and single-member LLCs pay self-employment tax under IRC §1401 on all net profit — 15.3% on the first $176,100 in 2025, with the 2.9% Medicare portion continuing above that. Electing S corporation status under IRC §1362 splits compensation between a reasonable salary subject to payroll taxes under IRC §3121 and pass-through distributions that are not. Once net profit runs consistently above $50,000 to $60,000, the self-employment tax savings typically outpace the cost of running payroll and filing additional returns.

The reasonable compensation requirement is real and the IRS enforces it specifically because underpaying salary to maximize distributions is the obvious move. Owner salary needs to reflect market rate for the actual work performed. I have seen owners set salary at $1 annually. That is not aggressive planning — it is an audit flag. Getting the structure right early matters more than correcting it later. For a closer look at how entity selection affects long-term tax outcomes, see this breakdown of entity structure and tax implications.

Which Deductions Are Business Owners Most Consistently Missing?

Vehicle, meals, and home office deductions produce the most unclaimed money I see in small business returns. Almost always because the documentation broke down, not because the expense was not real.

Vehicle deductions under IRC §162 require either actual expense records or a mileage log maintained at the time of travel. The 2025 standard mileage rate is 70 cents per mile. A log reconstructed months later does not hold up under examination — contemporaneous means at the time, not eventually. Business meals are 50% deductible under IRC §274 when the business purpose is documented. Home office deductions under IRC §280A require regular and exclusive use of a dedicated space. A desk in a shared room does not qualify regardless of how much work happens there.

Two credits most small business owners do not claim: the R&D credit under IRC §41 and the Work Opportunity Tax Credit under IRC §51. The R&D credit covers more than laboratory research — improving internal processes, developing software for business use, and creating new products can qualify. For eligible startups, it offsets payroll tax rather than income tax, useful even in a loss year. The WOTC is worth up to $9,600 per eligible hire specifically for service-connected disabled veterans who were unemployed for at least six months before hire — the standard maximum for other qualifying categories is lower. All WOTC claims require Form 8850 submitted to the state workforce agency within 28 days of the hire date. By the time most owners hear about it, the window is already closed.

Solo 401(k) or SEP-IRA: Which One Actually Fits Your Situation?

Both plans share the 2025 contribution ceiling of $70,000 under IRC §415, plus $7,500 catch-up for participants age 50 and over. Under SECURE 2.0, participants aged 60 to 63 qualify for a special $11,250 catch-up if the plan document allows it. Same ceiling, different path to get there.

A SEP-IRA under IRC §408(k) accepts only employer contributions capped at 25% of compensation. No employee deferral, no Roth option, no plan loans. Simple to administer and no annual filing requirement regardless of plan assets. A Solo 401(k) under IRC §401(k) combines an employee deferral of up to $23,500 in 2025 with an employer profit-sharing contribution, letting owners reach higher totals at lower income levels than a SEP-IRA permits.

Solo 401(k) makes more sense when you want maximum contributions at moderate income, a Roth deferral component, or the possibility of a plan loan. Once assets exceed $250,000, Form 5500 is required annually — SEP-IRA has no equivalent filing. For owners who want simplicity and already earn enough that the employer-only SEP formula reaches the ceiling anyway, the SEP-IRA is the cleaner choice. Model this before the plan year ends, not after it closes.

Are You Current on the 2025 Depreciation Rules?

Section 179 under IRC §179 allows businesses to expense up to $2,500,000 of qualifying property placed in service in 2025 under the One Big Beautiful Bill Act, phasing out dollar-for-dollar above $4,000,000 in total qualifying purchases. Equipment, software, and qualified improvement property all qualify. The placed-in-service date controls the deduction year — ordered in December, delivered in January means next year's deduction regardless of when payment cleared.

Bonus depreciation under IRC §168(k) had been stepping down — 60% in 2024, 40% for property placed in service before January 19, 2025. Legislation passed in 2025 restored 100% bonus depreciation for qualifying property placed in service after that date. If you deferred equipment purchases waiting for the rules to stabilize, the current window is the answer.

California does not conform to federal bonus depreciation. An owner taking 100% federal bonus on a $200,000 asset depreciates that same asset over its full recovery period on the California return. That gap accumulates across years and needs separate tracking. Section 179 and bonus depreciation can be combined, but California's non-conformity means the combined strategy always requires a separate state calculation — something preparers who work primarily in federal returns sometimes miss.

How Do You Stay Current on Estimated Taxes Without Overpaying?

Under IRC §6654, the safe harbor is paying either 90% of the current year's tax or 100% of the prior year's tax, whichever is smaller. Prior-year adjusted gross income above $150,000 raises that to 110% of the prior year's tax. Federal quarterly due dates in 2025 are April 15, June 16, September 15, and January 15, 2026.

California runs its own estimated tax schedule with different due dates and separate safe harbor thresholds. Owners who manage federal payments carefully and assume California follows the same calendar end up with state underpayment penalties that feel like they came from nowhere.

For seasonal or variable income, the annualized income installment method under IRC §6654(d)(1)(B) calculates each quarterly payment from actual year-to-date income rather than splitting the annual liability four equal ways. It takes more work but avoids overpaying in slow quarters while keeping the account current. If your revenue is uneven across the year, the extra preparation is usually worth it.

The decisions above interact with each other in ways that depend on your specific income level, entity type, and California tax position. Small errors in how these are tracked compound over time. For a detailed look at how that happens, see why small tax errors become permanent problems over time.

A structured review of how these strategies apply to your situation is part of the tax advisory services.

For IRS guidance on deducting business expenses, see IRS guidance on small business deductions.

Han S. Kim, CPA, EA, MST is a tax advisor based in California. This post is for educational purposes only and does not constitute legal or tax advice. Dollar thresholds and rates cited reflect 2025 tax year figures.

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