Entity Election and Timing

The single biggest tax decision a business owner makes is how the entity is taxed. An LLC by default is a disregarded entity (sole proprietor) or a partnership. Electing S-corp status changes how you pay yourself and how self-employment tax applies. An S-corp election lets you split income between salary (subject to payroll taxes) and distributions (not subject to them).

The timing matters. Filing Form 2553 by March 15 makes the election effective for the current year. File it late and you’re looking at relief provisions that aren’t guaranteed. We see business owners talk about the S-corp for months and then miss the deadline every year. Pick a date. File it.

Not every business should be an S-corp, though. If your net income is under $50,000 or highly variable, the payroll costs and administrative burden may eat up the savings. The break-even point depends on your income level, your state, and how much you need to reinvest in the business.

Reasonable Salary — The Number the IRS Watches

If you’re an S-corp owner, you have to pay yourself a “reasonable salary” before taking distributions. Set it too low and the IRS reclassifies your distributions as wages, plus penalties. Set it too high and you’re paying more payroll tax than necessary.

There’s no formula, but the IRS looks at what someone in your role, industry, and geography would earn. A solo marketing consultant in New York billing $400K probably needs to pay herself $90K to $130K in salary. A restaurant owner netting $200K might land at $60K to $80K. The right number is defensible, not aggressive. We’d rather our clients save steadily for years than save aggressively for one year and get audited.

Retirement Plans That Do More Than Save for Later

Retirement contributions are one of the few ways to reduce both your taxable income and your self-employment tax base. The options scale with your income:

• Solo 401(k) — up to $23,500 in employee deferrals (2025), plus 25% of compensation as employer contributions. Total ceiling: $70,000 for those under 50
• SEP IRA — simpler to administer, but contributions are employer-only. Good for businesses that want a set-it-and-forget-it plan
• Defined benefit plan — for high earners who want to shelter $100K to $300K+ per year. The contribution limits are based on actuarial calculations, not flat caps. This is the biggest deduction most business owners have never heard of
• Cash balance plan — a hybrid that can be layered on top of a 401(k) for even larger contributions

The right plan depends on your income, your age, how many employees you have, and how much cash you can part with. A 55-year-old business owner earning $500K can often shelter more than $250,000 per year in a defined benefit plan. That’s a deduction, not a deferral gimmick.

The QBI Deduction — Section 199A

The Qualified Business Income deduction lets eligible business owners deduct up to 20% of their qualified business income. For a business netting $200,000, that’s a $40,000 deduction — worth roughly $9,000 to $15,000 in tax savings depending on your bracket.

The catch: specified service trades or businesses (SSTBs) — which includes law, accounting, consulting, health care, and financial services — start losing the deduction when taxable income exceeds $191,950 (single) or $383,900 (joint) in 2025. Above those thresholds, the deduction phases out quickly. For business owners in non-service industries, the income limits don’t apply the same way, but W-2 wage and property basis tests come into play instead.

Vehicle, Home Office, and Everyday Deductions

These are the deductions everyone asks about first, even though they’re rarely the biggest savings. That said, they add up:

Vehicle deductions come in two flavors: actual expenses (gas, insurance, repairs, depreciation) or the standard mileage rate (67 cents per mile in 2024). Actual expenses work better for expensive vehicles. The standard rate works better if your car is paid off. You can’t switch back to standard mileage once you’ve used actual expenses on a vehicle, so the first-year choice matters.

Home office requires exclusive and regular use of a dedicated space. The simplified method gives you $5 per square foot up to 300 square feet ($1,500 max). The actual method can be larger but requires tracking real expenses. If you have a legitimate home office, take the deduction — the audit risk is overstated relative to the savings.

Hiring family members is a real strategy when done properly. Paying your children reasonable wages for real work shifts income to their lower bracket. Children under 18 employed by a parent’s sole proprietorship are exempt from FICA. That’s a payroll tax savings on top of the income shift.

Year-End Planning That Actually Works

The two classic year-end moves are accelerating expenses into the current year and deferring income to the next. They’re simple in concept but require attention to cash flow and timing.

Prepaying January rent in December. Buying equipment before year-end to take advantage of Section 179 or bonus depreciation. Making your fourth-quarter estimated tax payment early. Billing a client in January instead of December. None of these are tricks — they’re timing decisions that shift income between tax years.

The strategy breaks down if you do it every year in the same direction. Eventually you run out of expenses to pull forward and income to push back. The real planning question is: will your tax rate be higher or lower next year? If it’s higher, you want more income this year. If it’s lower, defer. That answer changes based on legislation, your personal income trajectory, and whether you’re planning a life change like selling the business or retiring.