The mercurial business landscape of the 2020s shows no signs of slowing down in 2025 and the businesses that adapt to this changing atmosphere will be the ones that achieve the most success. Though there are many variables out of a business’s control, there is one area that businesses can maximize without leaving things up to chance: their tax plan.
Small businesses that can reduce their tax obligations automatically improve their bottom line. But this process shouldn’t be carried out ad-hoc. In this article, we’re breaking down ways to shield income from taxes and taking a look at how small businesses can implement proven tax strategies to reduce their tax obligations in 2025. The tips provided in this article are not one-size-fits-all and businesses should consider consulting a tax professional who understands the rapidly changing tax nexus and the repercussions businesses stand to face in the wake of that changing nexus.
What Are the Different Types of Business Taxes?
Before we break down the various tips for reducing your taxes in 2025, let’s look at some of the taxes you will have to account for. Understanding your tax obligations is the first step toward creating an effective tax reduction plan that suits the needs of your business.
Income Taxes
Income taxes include any federal and state income taxes. Whether your business pays the tax, as they do in organized C corporations, or the owner pays the tax, as they do in sole proprietorships, partnerships, limited liability companies, or S corporations, these taxes must be accounted for before creating your tax reduction plan.
Employment Taxes
If your small business has employees, you have to withhold income taxes and the employees’ share of Social Security and Medicare taxes. You also have to account for the employer’s share of FICA, in addition to state and federal unemployment taxes. If your business is incorporated, you are considered an employee and you owe taxes even if you are the only employee in the entire business. Those who are self-employed owe self-employment taxes on their net earnings from the business.
Sales Taxes
If you sell goods and services and you are based in a state with a sales tax, you might be required to collect sales taxes on your transactions. Even though the customers pay sales tax, you might be subject to penalties for failing to collect the taxes and pay them to the state.
Excise Taxes
Depending on what type of business you operate, some businesses might pay excise taxes on items such as fuels, highway usage by trucks, and other activities.
Choosing the Right Deductions
There are many ways to reduce tax income, but you can simplify the selection process by choosing the deductions that offer the most advantages for your small business. To start, you need a comprehensive review of your record-keeping process. Thorough record-keeping processes clarify the areas of the tax law where you can take deductions. Without this thorough records-keeping process, you stand to leave money on the table.
Having the following systems in place will better equip you to take advantage of all your tax deductions:
- Concrete system to track income and expenses- You should have a software system capable of handling your basic record-keeping needs. These software solutions keep everything neatly organized in the cloud so you don’t have to worry about manual mishaps or human oversight.
- Collection and storage of receipts and expenditures- Software can also handle this, so long as you have a filing system in place to categorize your receipts such as meals, entertainment, and capital expenditures.
- Established policies on record-keeping- Do you have procedures in place to track your expenditures and records-keeping process? If you have employees, you will also need to clearly define your processes so that everyone follows the letter of the law.
Stay Updated On Current Tax Laws
With changes in how business is conducted, such as the rise of eCommerce, and the complex eCommerce sales tax nexus that accompanies it, businesses must adapt. Major legislation changes, court cases, and IRS rulings occur frequently throughout the year, and these events cause changes to tax codes and present companies with tax reduction opportunities.
The key to taking advantage of changing tax laws is that you act quickly and demonstrate a thorough understanding of the consequences. Waiting for the annual meeting with your accountant likely won’t give you the time you need to learn about and act on these opportunities. However, when you use an outsourced accounting service such as Fully Accountable, you enjoy the benefit of having fractional tax professionals whose job it is to stay ahead of the curve regarding the tax code.
Employ a Family Member
Once you have your tax operations in place, there are a few easy tips you can incorporate to maximize your savings from your tax reduction plan. One of the best ways to do this is by hiring a family member. The IRS offers various tax breaks for hiring a family member that can shelter you from income taxes.
Small business owners can pay a lower marginal rate or eliminate income taxes paid to their children. If you own a sole proprietorship, for example, you do not need to pay social security or Medicare taxes on your child’s wages. You also don’t have to pay the Federal Unemployment Tax Act (FUCA) tax. These earnings must be justifiable. In other words, your child has to occupy an actual position, or else you’re committing fraud.
You can also reduce your tax obligations by hiring a spouse. Your spouse would also be exempt from paying the FUCA tax and depending on the benefits they receive from another job, you might also be able to put aside retirement savings for them.
Start a Retirement Plan
As a small business owner, you forfeit the opportunity for a 401(k) matched by an employer. However, you can still maximize retirement savings using the following retirement account options. With a one-participant 401 (k) plan, you can contribute up to $57,000 in total contributions for retirement.
Some examples of retirement accounts include:
- Simplified Employee Pension Plan (SEP)
- IRA or Roth IRA
- 403(b) plans
The IRS also has a number of different retirement plans for business owners on their website as a tax savings strategy.
Save Money for Healthcare Needs
One of the most effective ways for small businesses to save money can be accomplished by business owners setting aside money for healthcare needs. As medical costs increase, saving money for unexpected health challenges can prove invaluable. You can start saving money for healthcare by investing in a Health Savings Account if you have an eligible high-deductible health plan.
Saving for healthcare needs accomplishes savings in three ways, which is otherwise known as the triple tax advantage. The contributions you make are pre-tax, they grow tax-free, and withdrawals for qualified medical expenses are tax-free.
Modify Your Business Structure
As a small business owner, you don’t have the benefit of an employer paying your taxes. You have to foot the bill on Social Security and Medicare taxes. If your business is taxed as a Limited Liability Company, you have to pay all of those taxes.
However, in some cases, you might be able to eliminate the employer portion of your tax responsibilities by electing to be taxed as an S Corporation. That way, the business owner’s salary will be subject to FICA taxes like any other employee’s salary. After that, the rest of the LLC’s income passes through as a distribution of business income not subject to FICA taxes. It also helps you avoid owing self-employment tax on a large portion of your income.
If you don’t pay taxes as an S corporation, then you have to pay the self-employment tax on all of the business’s net earnings.
Deduct Travel Expenses
Travel expenses can be a huge burden on the finances of a small business, but deducting travel expenses is a great way to decrease taxable income and save money on travel. Deducting travel expenses is an advisable strategy if you travel a significant amount for your job. Business travel is a fully deductible expense, though personal travel does not enjoy the same benefit. If you want to maximize your business travel, you can combine personal travel with justifiable business purposes. Any frequent flier miles earned from business travel can also be redeemed for personal travel later.
Watch Adjusted Gross Income
Tax breaks, limitations, and additional taxes can be remedied by paying attention to your adjusted gross income (AGI) or modified adjusted gross income (MAGI). For example, if your AGI doesn’t exceed $200,000 (single) or $250,000 (married filing jointly), you will automatically avoid the 0.9% additional Medicare tax on earned income.
Reimburse Using an Accountable Plan
Using a reimbursement plan for your employees can result in substantial tax breaks. Before you do so, you should make sure your proposed plan meets the IRS’s requirements. This is called an accountable plan. Using this plan, your business can deduct expenses without reporting the reimbursements as income to employees, potentially lowering overall taxable income.
You can reimburse employees for the following expenses:
- Travel
- Entertainment
- Tools
If your company doesn’t already have an accountable plan for employee reimbursement, your employees will likely ask you for one. Under the new tax nexus, employees cannot deduct miscellaneous unreimbursed employee expenses. Giving your employees an accountable plan for reimbursements helps them save money on taxes and aids the business’s overall tax plan. Using this approach is a win-win.
Advisable Tax Elections
Making smart decisions for your tax elections is an ongoing process that requires continued deliberation. However, there are several ways to reduce taxable income, such as being strategic about business expenditures. You should investigate your depreciation for these items to see if it might be more advisable to spread your purchases across multiple tax years instead of deducting the full price at one time.
As an example, let’s assume you are in the 15% tax bracket now, but you expect to bump into the 35% tax bracket over the next couple of years due to your business growth. If you apply the $10,000 deduction, you would stand to save $1500 in taxes. Depreciation over 5-7 years would produce total savings in the 35% bracket of around $3500 or $2000 or more.
You should also question whether you should deduct vehicle expenses based on actual costs or the IRS mileage allowance, which is around 58 cents per mile. Another deduction question stems from whether you should deduct home office expenses based on actual or IRS simplified rates. Lastly, if your business endures a disaster, you should consider whether you want to claim on prior-year returns rather than on the return year during which the disaster occurred.
You can also consider deducting your business insurance expenses paid every year and the IRS form 1040 can help determine whether this is an advisable course of action. The following provides a list of the business insurance coverages you can deduct:
- General Liability Insurance
- Workers’ Compensation Insurance
- Commercial Auto Insurance
- Business Interruption Insurance
The IRS heavily scrutinizes small businesses due to the potential for tax fraud. Because of this small business owners need to be careful when trying to deduce what premiums can be deducted as legitimate business expenses.
Use Tax-Free Ways to Extract Income
Your taxable assets include your salary, bonuses, and distributions of your share of business profits. However, there are non-taxable, legal ways to benefit from your business’s success. The following represents a few ways to accomplish this:
Tax-free fringe benefits include medical coverage, health savings accounts, and retirement plans (as previously discussed).
Loans from the business to you as a no or low-interest loan. If the loan is below the IRS-set rates (Applicable Federal Rates), the business must report the interest from the arrangement.
Abandoning Vs. Selling Property
If your business owns property that carries no value to the business, you should discuss whether abandoning the property would make more sense than selling it. Taking a normal loss on the property is fully deductible, rather than treating the loss as a capital loss, which is subject to limitations.
Utilize Fringe Employee Benefit Packages
Additional wages for employees will also trigger more tax obligations. However, you can offset some of these requirements by offering certain fringe benefits for employees. Tax-exempt benefits you can consider include the following:
- Employer-sponsored health insurance
- Long-term care insurance
- Group term life insurance
- Disability insurance
- Educational assistance
- Dependent care assistance
- Transportation benefits
- Meals provided for employee convenience
- Paying Your Employees to Get Vaccinated
Employers can still take advantage of tax credits for the compensation paid to employees when missing work due to illness or other personal reasons. The credit also covers any additional time missed due to vaccine complications. Some of these benefits are extending into 2025, and employers should meet with their accounting team to determine whether they are eligible for the tax break.
Tax Reduction Plans for Small Businesses In 2025
As a small business owner, you should constantly be searching for ways to improve your net profit. One of the easiest ways to do this is by reducing your tax obligations by minimizing your taxable income. The savviest entrepreneurs understand that reducing your taxes is one of the most strategic maneuvers you can commit to while in the early stages of your business.
However, tackling this endeavor can prove challenging if you don’t fully understand how taxes work. That’s where hiring an outsourced accounting team can prove highly beneficial. Not only do you avoid the headaches of hiring an in-house accounting team when you use our services, but you also have fractional professionals who dedicate themselves entirely to ensuring you receive the most from your tax plan.
At Fully Accountable, we don’t leave tax money on the table. Our team of licensed controllers and fractional CFOs can ensure you maximize your profits and no longer question whether you’re getting the most out of your tax plan.
Contact us today to lower your tax bill and learn more about what the professionals at Fully Accountable can provide your business.
