Many small business owners ignore tax planning. They may not think about their taxes until it is time to meet with their accountants. However, tax planning is an ongoing process, and good tax advice is valuable. Reviewing income and expenses monthly and meeting with your CPA or tax advisor quarterly can help you identify tax credits, deductions, and other benefits that may legally be available to you.
Important: The tax laws, rates, deductions, and dollar amounts discussed in this article refer primarily to the United States. Some figures relate to the 2024–2026 tax years and may have changed. Consult a qualified tax professional to confirm the rules applicable to your situation and tax year.
Table of Contents
- Tax Avoidance vs. Tax Evasion
- Tax Planning Strategies
- Business Meal and Entertainment Expenses
- Important Business Automobile Deductions
- Depreciation-Related Deductions
- Get Professional Tax Advice
Tax Avoidance vs. Tax Evasion
Tax avoidance through lawful planning is legal. Tax evasion, on the other hand, involves unlawfully reducing the amount of tax owed through deceit, fraud, or concealment.
In the United States, the IRS may examine whether a taxpayer acted with fraudulent intent. The following are four areas that may raise concerns during a tax examination:
- Failure to report substantial income: For example, a shareholder failing to report dividends or a store owner failing to report some daily business receipts.
- Fictitious or improper deductions: For example, substantially overstating travel expenses or claiming charitable contributions without adequate supporting documentation.
- Accounting irregularities: These may include inadequate business records or discrepancies between amounts reported on a corporation’s tax return and its financial statements.
- Improper allocation of income: For example, improperly allocating income to a related taxpayer in a lower tax bracket, such as through distributions to a controlling shareholder’s children.
Accurate reporting, complete records, and professional tax advice can help business owners avoid costly compliance problems.
Tax Planning Strategies
Small business owners can use a variety of tax planning strategies. Some focus on the owner’s individual tax situation, while others focus on the business itself. Depending on the circumstances and applicable law, these strategies may aim to achieve one or more of the following goals:
- Reduce taxable income.
- Lower the applicable tax rate.
- Manage the timing of tax payments.
- Claim eligible tax credits and deductions.
- Manage the effects of the Alternative Minimum Tax, where applicable.
- Avoid common tax planning mistakes.
Effective planning requires estimating your personal and business income for the coming years. A strategy that saves taxes at one income level may result in a larger tax bill at another. Inaccurate income projections can therefore undermine an otherwise sound tax plan.
Once you have estimated your income, you can assess the tax brackets and rules that may apply to you. You should already be projecting sales revenue, income, and cash flow for general business planning. The more accurate your estimates, the better positioned you will be to make informed tax planning decisions.
Business Meal and Entertainment Expenses
Business meal expenses may qualify for a tax deduction when they meet the requirements of the applicable tax law. Business must generally have a legitimate purpose, and the expense must satisfy relevant documentation and deductibility rules. Keep records showing the amount, date, business purpose, attendees, and other required details.
For example, a meal at a quiet restaurant where business matters are discussed may meet the relevant business-purpose requirements. However, the location alone does not determine whether an expense is deductible.
Under the United States Tax Cuts and Jobs Act of 2017, many qualifying business food and beverage expenses remained subject to a 50% deduction limit. Special rules also applied to certain meals provided to employees. The temporary treatment of some employer-provided meals for tax years 2018 through 2025 should not be assumed to apply to later tax years.
The Act also generally eliminated the deduction for business entertainment expenses. Exceptions and specific rules may apply, so confirm the treatment of each expense with a qualified tax professional.
Important Business Automobile Deductions
If you use a vehicle for business purposes, such as visiting clients or attending meetings away from your regular workplace, you may qualify for deductions for eligible vehicle expenses under the applicable tax rules.
In the United States, eligible taxpayers have traditionally been able to calculate vehicle deductions using either an applicable standard mileage rate or qualifying actual vehicle expenses, subject to eligibility requirements and restrictions.
The standard business mileage rate was 67 cents per mile for 2024. This is a historical rate and should not be used for another tax year without verification.
If you use more than one vehicle for business, you should maintain separate, accurate records of the business and total mileage for each vehicle. Business-use percentages and deductible expenses must be calculated according to the applicable rules. Using multiple vehicles does not automatically increase the amount you can deduct.
Regardless of the method used, retain supporting documents such as mileage logs, receipts, and records of the business purpose of each trip.
Depreciation-Related Deductions
Some business assets may qualify for accelerated deductions rather than being deducted gradually over their useful lives. In the United States, Section 179 expensing and bonus depreciation are two provisions that may allow qualifying businesses to deduct some or all of the cost of eligible property, subject to statutory limits and other requirements.
Section 179 Expensing
Section 179 may allow a business to deduct the cost of qualifying equipment and certain software in the year the property is placed in service. Eligibility, annual deduction limits, investment limits, taxable-income restrictions, and other requirements apply.
The original source cites the following figures for the 2024 tax year: a maximum Section 179 deduction of $1,220,000 and an investment limit of $3,050,000. These are historical figures and should not be treated as current limits. Confirm the applicable limits for the tax year in question before making a purchase or filing a return.
Certain improvements to nonresidential real property may also qualify under specific provisions. Eligibility depends on the type of property, the nature of the improvement, and the applicable tax rules.
Bonus Depreciation
Bonus depreciation may allow businesses to deduct a qualifying percentage of the cost of eligible property in the year it is placed in service. The percentage and eligibility rules depend on the acquisition date, placed-in-service date, property type, and law applicable to the relevant tax year.
The original source describes a phase-down schedule of 80% for 2023, 60% for 2024, 40% for 2025, and 20% for 2026 for certain qualifying property. These figures reflect the schedule described in that source and should be verified against the law applicable to the relevant transaction and tax year before use.
Because depreciation rules can significantly affect taxable income and cash flow, consult a tax professional before deciding when to purchase or place equipment in service.
Get Professional Tax Advice
The strategies discussed above are examples of tax planning opportunities that may be available to business owners. The best approach depends on your business structure, income, expenses, investment plans, location, and applicable tax laws.
Review your financial records regularly and work with a qualified CPA or tax advisor to identify lawful tax-saving opportunities, meet filing obligations, and make informed decisions throughout the year.
Editorial note: This guide contains general information about life insurance. Some examples, cost assumptions, product descriptions, and references in the original article may be dated or vary by insurer and jurisdiction. Review current policy documents and consult a qualified insurance or financial professional before making coverage decisions.
