As a business owner, you are probably always looking for ways to cut costs legally, particularly when it comes to taxes. While you may find it hard to wrap your head around the U.S. tax code, the fact remains that there are several provisions that allow entrepreneurs to lower their tax liability. The trick is knowing how to navigate it. Here are some practical strategies that can help you save significant amounts of money on taxes—without crossing any legal lines.

Tax Planning Strategies For Entrepreneurs

Choosing a Business Structure

Fixing on an appropriate business structure is essential to decreasing your tax burden. Many entrepreneurs start as sole proprietors or LLCs, which offer simplicity, but these aren’t always the most tax-efficient options.

For example, switching to an S Corporation could allow you to pay yourself a reasonable salary and take the rest as dividends. This means part of your income isn’t subject to payroll taxes (Social Security and Medicare). For 2024, the payroll tax rate is 15.3%, which is a significant chunk of change.

However, the IRS scrutinizes S Corp owners to ensure their salary is “reasonable.” You can’t just pay yourself a symbolic $1 salary and take the rest as dividends. If you’re earning $300,000 a year, you can’t assign $250,000 as dividends to avoid payroll taxes. This needs careful planning, but when done right, it’s a highly effective tax-saving strategy.

Take Advantage of Section 179 and Bonus Depreciation

If your business purchases major equipment or vehicles, the savings for small businessmen can be significant, if they leverage Section 179 of the IRS Code and bonus depreciation rules. Under Section 179, you are allowed to deduct the full cost of qualifying equipment and software purchased during the year. That’s instead of spreading the deduction out over several years.

Besides this, in the first year, bonus depreciation enables you to deduct a further 60% of the cost of qualified property in 2024 (the bonus depreciation percentage was 100% before 2023). That rule applies not just to new equipment but also to used equipment, which can be a great advantage when buying pre-owned assets to save on heavy upfront cost.

Combining Section 179 with bonus depreciation means you can immediately write off huge investments in things like office equipment, machinery, and even company vehicles (if they’re over 6,000 pounds). This can have a massive impact on your tax liability in the year of purchase.

Retirement Plans: Solo 401(k) and SEP-IRA

Tax-deferred retirement plans are a goldmine for those who own businesses. One of its attractions is the employer and employee contributions of the Solo 401(k). As of 2024, your contribution can go up to $23,000 (or $30,500 if you’re over 50) as an employee. On top of that, you can contribute up to 25% of your net income as the employer, up to a combined limit of $69,000 for 2024.

For entrepreneurs with fluctuating income or lower administrative needs, a SEP-IRA might be a better choice. You can contribute up to 25% of your compensation, with a maximum limit of $69,000 in 2024. Contributions to either plan are tax-deductible, reducing your taxable income for the year.

If you’re not taking advantage of these plans, you’re leaving money on the table—both in immediate tax savings and in long-term tax-deferred growth.

Qualified Business Income Deduction (QBID)

Under the Tax Cuts and Jobs Act, this deduction applies to Qualified Business Income Deduction (QBID), basically, eligible businesses permitted to offset up to 20 percent of their qualified business income (QBI) from tax liability. Sole proprietorships, S Corps, partnerships, and some LLCs are eligible. However, the rules get complicated if your taxable income exceeds a certain threshold—$383,900 for married filing jointly and $191,950 for single filers in 2024.

At this point, the deduction phases out or becomes limited based on the nature of your business. For instance, if you run a “specified service trade or business” (like law, accounting, or healthcare), the QBID can be cut off from your claim in case your income surpasses the threshold that has been set.

The key here is to plan your income accordingly, potentially deferring some income to the following year or accelerating deductions into the current year if you’re near those limits. Advanced planning with an accountant can help you maximize this deduction before it phases out.

Health Reimbursement Arrangements (HRAs)

If you have employees, one good way of cutting your taxable income is through a Health Reimbursement Arrangement (HRA). What’s more, this provides an excellent benefit to your staff. In 2024, you can offer up to $12,450 per employee in tax-free reimbursements for medical expenses through an HRA.

For small businesses, an Individual Coverage HRA (ICHRA) is especially useful as it allows you to reimburse employees for individual health insurance premiums and qualified medical expenses tax-free.

Plus, the amounts you reimburse are deductible as a business expense, lowering your taxable income. For sole proprietors and self-employed individuals, a Qualified Small Employer HRA (QSEHRA) allows you to do something similar on a smaller scale.

Timing Your Income and Deductions

You may not have realized it, but the most effective tax planning is simply a matter of timing. Cash-based businesses have the flexibility to time income and expenses to their advantage. So, if you anticipate being in a lower tax bracket next year, you have the option to defer billing customers until January. Similarly, you can accelerate expenses into the current year to maximize deductions when your income is higher.

This also applies to capital expenditures. If you know you’re going to have a profitable year, consider making big purchases, like equipment or vehicles, before the end of the year to take advantage of the Section 179 deduction and bonus depreciation.

State Tax Strategies

It wouldn’t be wise to overlook state and local taxes. Certain states provide special tax credits or deductions which might be worth looking into. California’s R&D tax credit or New York’s incentive programs for job creation can be valuable, but to qualify for these, you would need careful planning.

Also, if your business is based out of a high-tax state, it might make sense to simultaneously start up a whole other business in a state with no income tax, perhaps somewhere like Texas or Florida. Yes, this is likely to call for added logistical effort and careful planning around nexus laws (rules that determine where your business has a tax presence), but it can save you thousands over time.

Final Thoughts

You don’t have to wait until April to do tax planning. It is a year-round strategy that can mean huge savings for your business, provided it’s done the right way. Generally, it is best to have an experienced tax advisor who understands the nuances of the U.S. tax code. It’s a matter of knowing where to look and staying proactive. For any assistance contact our CPA tax accountant in California.