There are numerous tax reduction strategies available to business owners. The list below is just a few. I thought we would start with the most current tax law updates, and the strategies that generate the most questions we receive.
Business tax changes for 2025
- 100% Bonus Depreciation: The 100% first-year depreciation deduction for qualifying business property has been made permanent.
- Deductibility of Research and Development (R&D) Expenses: Domestic R&D expenses can be immediately deducted.
- Section 179 Deduction Increase: The maximum Section 179 deduction for small businesses has increased to $2.5 million.
- Qualified Business Income (QBI) Deduction (Section 199A): The 20% QBI deduction is made permanent and expanded.
Business travel expenses
So many new clients I run into are not using business travel expenses to their full advantage. Some clients get audited, and simply cannot document the deductions accurately, which means they may be incurring interest and penalties. There are many new apps out now, which make this task very simple. Popular options include Fyle, TripLog, Hurdlr, MileIQ, and Everlance. These apps offer features like automatic tracking, manual trip logging, and integration with expense reports.
- If you travel away from home for business purposes, you can deduct the ordinary and necessary expenses associated with that travel.
- This includes costs like airfare, train or bus travel, car rental, lodging, meals (typically 50% deductible), taxis, and transportation between the airport/hotel and your business destination.
- You can also deduct expenses like dry cleaning, laundry, business calls, and tips incurred while on your trip.
- Remember to keep meticulous records and ensure your expenses are reasonable and related to your business activities.
Advertising and marketing
- Expenses incurred to attract new customers, and retain existing ones, are generally tax-deductible.
- This includes costs for developing, producing, and placing advertising, regardless of the format (print, digital, social media, etc.).
- Costs associated with building your brand, creating engaging content and running marketing campaigns are also deductible.
- However, be mindful of exceptions like permanent signs (which are depreciated) or political advertising (which is not deductible).
Business Taxes eventually pass down to your personal return via Schedule K-1, generated from an S-Corp tax return (Form 1120-S), or from a Partnership tax return (Form 1065). Sole proprietors report their business income within the Individual income tax return (Form 1040) on Schedule C. Rental income is also reported on Form 1040; however, this income is reported on Schedule E.
In a nutshell, how a business passes funds to its owners depends upon the legal business structure.
- Sole proprietorships and single-member LLCs: Owners typically use an owner’s draw to withdraw funds for personal use. This is a direct transfer from the business account to the owner’s personal account, and reduces the owner’s equity in the business. It’s crucial to document these draws meticulously, though they are not considered a business expense.
- Partnerships: Partners in a partnership, similar to sole proprietors, also utilize partner draws to receive a share of the business profits. Partnership agreements typically outline the distribution schedule and allocation percentages.
- S Corporations: Owners of S Corporations, who actively work in the business, must pay themselves a reasonable salary through formal payroll, subject to payroll taxes. Additional profits can be distributed as dividends, which are not subject to self-employment taxes, offering potential tax advantages. However, owners must ensure their salary is deemed “reasonable” by the IRS to avoid potential tax issues.
- C Corporations: Owners of C Corporations, who are employees of the company, receive a salary through payroll, with applicable taxes withheld. Profits can also be distributed as dividends to shareholders; however, these dividends are subject to double taxation (taxed at both the corporate and individual levels).
Key Considerations
- Tax implications: The chosen method for transferring funds impacts the owner’s tax liability, and may require careful planning and potential estimated tax payments. Since sole proprietors and partners are not employees of their companies, they may be liable for self-employment tax.
- Business financial health: Owners must balance their personal needs with the financial stability of the business, ensuring that withdrawals don’t jeopardize operations or growth opportunities.
- Business entity type: The legal structure of the business dictates the available methods for distributing funds to owners.
- Documentation: Regardless of the method, accurate record-keeping is essential for financial transparency and tax compliance.
We currently operate five different businesses, and as a business owner like yourself, I have learned numerous ways to enhance our businesses. We created BizExitsRUs to share ideas, and provide trusted resources to help you enhance your business, whether you are transferring it to the next generation, or selling it at the highest potential market value possible. Key takeaways are as follows: we need liquidity, access to capital, best returns for our money, little to no market losses and efficiency on taxes. This all yields more spendable funds for you and your family. I love this quote from one of my clients that just sold their business. “I did not live to work; I worked to live.”
The information provided is for general informational purposes only, and does not constitute tax advice. Please consult your tax advisor or CPA for guidance specific to your financial situation.