Tax Strategies That May Reduce Your Bill
Whether you are starting out or just getting started, it's always smart to review your tax situation
Last week, I promised to dive deeper into specific tax strategies for small businesses, including often-overlooked deductions that can save you thousands annually. Today, I'm delivering on that promise with actionable strategies you can implement before year-end.
Choosing the Right Business Structure: It's Not Just About Liability
Your business structure isn't just a legal formality—it's a tax strategy. Here's when to use each tax election:
Sole Proprietorship taxation works best for simple, low-risk businesses with minimal liability concerns. Single-member LLCs default to this treatment, providing liability protection while maintaining tax simplicity. You'll pay self-employment tax on all profits, but set up and ongoing compliance costs are minimal. Consider this if you're testing a business idea or running a low-revenue side hustle.
Partnership taxation makes sense when you have multiple owners and want operational flexibility. Multi-member LLCs default to partnership tax treatment, offering liability protection that general partnerships lack. Profits and losses flow through to partners' personal returns, avoiding double taxation. However, partners generally pay self-employment tax on their share of profits.
S Corporation taxation can provide significant self-employment tax savings. Any LLC can elect S Corp tax treatment while maintaining the LLC's operational flexibility and liability protection. You'll save on self-employment taxes since only your reasonable salary (not distributions) is subject to payroll taxes. The trade-off? More paperwork, payroll requirements, and restrictions on ownership types.
Discuss with your accountant when S Corp taxation makes sense for your specific situation—the break-even point varies based on your profit levels, ability to pay reasonable compensation, and administrative capacity.
SALT Workarounds: Recovering Your State Tax Deductions
The state and local tax (SALT) deduction cap has hit many business owners hard, but there are legitimate workarounds. The cap is $40,000 starting this year.
Pass-through entity (PTE) elections are now available in most states. Your partnership or S Corp pays state taxes at the entity level, then you get a federal deduction for those payments while claiming a state tax credit on your personal return. This effectively bypasses the SALT cap for business income.
Check if your state offers PTE elections—most do, and the deadline is usually the entity's tax filing due date. This single strategy can recover thousands in lost deductions.
Track Every Deductible Expense (They Add Up Fast)
Small businesses lose thousands by failing to track legitimate business expenses. Here's your system:
Separate business accounts aren't optional—they're essential. Commingled funds make expense tracking nearly impossible and raise audit red flags.
Digital expense tracking beats shoeboxes every time. Use apps like QuickBooks, Expensify, or even your bank's business app to categorize expenses in real-time. Take photos of receipts immediately.
Don't overlook these commonly missed deductions:
Home office expenses (if you use part of your home exclusively for business)
Business mileage (track every business trip)
Professional development and industry conferences
Business meals (50% deductible)
Professional subscriptions and memberships
Business insurance premiums
Set up monthly expense reviews. Fifteen minutes each month beats scrambling at year-end.
Research and Development Credits: Not Just for Tech Giants
Many small businesses qualify for R&D credits but never claim them. The definition is broader than you think, and the research doesn't have to be groundbreaking—many commonly researched items can qualify:
Federal R&D credits apply to activities aimed at eliminating technical uncertainty. This includes developing new products, improving existing ones, or creating new processes. Even failed experiments qualify, and routine activities like market research or quality control improvements often meet the criteria.
State R&D credits often provide additional benefits and may be refundable or transferable. California, Connecticut, and New York offer particularly generous programs.
Document everything: payroll for employees working on qualifying activities, supplies used in experiments, and contractor costs for R&D work. The credit can offset both income tax and payroll tax liability.
Opportunity Zones: Long-Term Wealth Building
If you have capital gains from other investments, Opportunity Zones offer powerful tax advantages:
Invest gains in Qualified Opportunity Zone funds within 180 days to defer taxes until December 31, 2026. Hold for ten years and pay zero tax on appreciation within the Opportunity Zone investment.
This works particularly well if you're selling business assets or investment property and want to redeploy proceeds into underserved communities while building long-term wealth.
Bonus Depreciation: Maximize Your Real Estate Benefits
Current law allows 80% bonus depreciation in 2023, dropping to 60% in 2024 and 40% in 2025. However, very recently passed legislation increases bonus depreciation to 100% for property acquired after January 19, 2025.
Strategy for real estate buyers: If you're purchasing commercial real estate, conduct a cost-segregation study to maximize bonus depreciation benefits. This engineering-based analysis identifies property components that qualify for accelerated depreciation, potentially allowing you to deduct a large portion of your purchase price in the first year through bonus depreciation.
The combination of 100% bonus depreciation expensing and cost-segregation studies can create substantial first-year tax benefits for real estate investors.
State Credits: The Hidden Goldmine
Every state offers different credit opportunities. Research yours:
Hiring credits for employing residents from certain areas or demographics Training credits for employee development programs Historic rehabilitation credits if you're renovating older commercial buildings Film production credits in states promoting entertainment industry Angel investor credits if you invest in qualifying start-ups
Many state credits are refundable or transferable, providing cash even if you don't owe state taxes.
Your Next Steps
Tax planning isn't a year-end activity—it's an ongoing strategy. Here's what to do this week:
Review your business structure with your accountant
Research PTE elections if you're in a partnership or S Corp
Set up systematic expense tracking
Document any activities that might qualify for R&D credits
Research state-specific credit opportunities
Remember: the best tax strategy is the one you actually implement. Start with the strategies that offer the biggest bang for your effort, then build from there.
The tax code rewards business owners who pay attention and plan ahead. Don't leave money on the table—these strategies can save you thousands annually when properly executed.
Always talk to your attorney or advisor before taking any tax action. The tax rules are complex. This newsletter is provided as a guide to frame your thinking.
Next week, I'll cover asset protection strategies that complement these tax moves, including how to structure your business holdings to protect wealth while maintaining tax efficiency.
Disclaimer: U.S. Treasury rules require that any written Federal tax advice by the firm which does not meet the standards of a formal tax opinion letter (including advice in this email) must state that the taxpayer may not rely upon the written advice for the purpose of avoiding penalties which might otherwise be imposed by the Internal Revenue Service with respect to the taxpayer's reporting position.