Tax Planning Strategies That Can Legally Reduce Your Tax Bill

1. Get the entity structure right

The largest single tax lever for most business owners is entity structure — LLC vs. S-Corp vs. C-Corp. We cover this in detail in our LLC vs. S-Corp article, but the summary: a profitable service business over roughly $100,000 of net income is usually leaving thousands per year on the table by staying as a default LLC.

2. Maximize the right retirement plan

Solo 401(k) plans allow up to $69,000 (2024) in combined employee-plus-employer contributions for a self-employed owner with no employees — one of the largest tax deductions available to a small business.

SEP-IRAs are simpler but capped at 25% of W-2 wages. Defined benefit plans can allow $150,000+ in annual contributions for high-income professionals in their 50s. The right plan depends on age, income stability, and whether you have employees.

3. Elect the California Pass-Through Entity (PTE) tax

Since 2021, California allows S-Corps and partnerships to elect to pay a 9.3% entity-level tax that is fully deductible on the federal return, giving owners a federal SALT workaround worth thousands per year. The election has to be made and paid by June 15 of the tax year — miss it and the door closes for that year.

Most S-Corp and partnership clients we work with make this election every year. If yours does not, ask why.

4. Preserve the 20% QBI deduction

The Section 199A Qualified Business Income deduction lets pass-through owners deduct 20% of qualified business income, subject to income and industry limits. For 'specified service trades or businesses' (law, health, consulting, financial services), the deduction phases out above roughly $383,900 of taxable income for joint filers (2024).

Planning near that threshold — via retirement contributions, charitable giving, or income deferral — often preserves a five-figure deduction that would otherwise phase out entirely.

5. Time income and expense deliberately

Cash-basis businesses can shift the tax year of income by billing on December 31 vs. January 2, and shift deductions by prepaying expenses (rent, insurance, supplies) before year-end.

Accrual-basis businesses have less flexibility on timing, but can still accelerate purchases, complete jobs, or defer invoicing where the numbers justify it.

6. Use depreciation strategically

Section 179 and bonus depreciation let businesses fully expense qualifying equipment, vehicles over 6,000 lbs GVWR, and certain building improvements in the year placed in service. For real estate investors, cost-segregation studies reclassify building components into shorter-lived assets, often accelerating six figures of depreciation into the first year.

These are not free money — they trade a tax deduction today for less depreciation tomorrow — but the time value of that shift is often substantial.

7. Employ family members legitimately

Paying your minor children reasonable wages for real work in a family-owned business (in most cases: age 7+, documented tasks, payroll processed properly) shifts income from your bracket to theirs and can fund a Roth IRA. Done properly this is 100% IRS-supported. Done sloppily it is a red flag.

8. Donor-advised funds and bunching

For clients who itemize, bunching two years of charitable giving into one calendar year via a donor-advised fund often clears the standard deduction hurdle and preserves the full charitable deduction. Appreciated stock (rather than cash) gets the double benefit of a deduction at fair market value and no capital gain recognition.

Frequently asked questions