Tax Optimization

Business Owner Tax Strategies: Keep More of What You Earn

Legal Strategies to Reduce Your Tax Burden

Smart business owners use legal tax strategies to reduce their tax burden by $50K-$200K+ annually. Learn entity optimization, retirement planning, and advanced tax reduction techniques.

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$20K-$50K+

Annual S-Corp Tax Savings Potential

20%

QBI Deduction on Qualified Income

$300K+

Possible Annual Retirement Contributions

15.3%

Self-Employment Tax Rate Avoided

Quick Answer

S-Corp election can save $20K-$50K+ annually by reducing self-employment taxes on profits above reasonable salary
Section 199A QBI deduction provides up to 20% deduction on qualified business income - potentially $50K-$100K+ in deductions
Stacked retirement plans (Solo 401k + defined benefit) can shelter $200K-$300K+ annually from taxes
Entity structure should be reviewed annually - the wrong structure costs business owners tens of thousands in unnecessary taxes
Augusta Rule allows 14 days of tax-free rental income from your home for legitimate business use

The Opportunity

Why This Matters for Business Owners

Entity Structure Optimization

Your choice of business entity (sole proprietor, LLC, S-Corp, C-Corp) determines how income is taxed. The wrong structure can cost you $20K-$100K+ annually in unnecessary taxes. S-Corp election alone can save owners $20K-$50K+ per year by reducing self-employment taxes on profits above reasonable salary.

Section 199A QBI Deduction

The Qualified Business Income deduction allows pass-through business owners to deduct up to 20% of qualified business income. For a business owner with $500K in QBI, this is a potential $100K deduction worth $37K+ in tax savings. Income limits and specified service business rules require careful planning.

Retirement Plan Tax Leverage

Business owners can access retirement plan contribution limits far exceeding employee plans. A Solo 401(k) allows $69K (2024), but adding a defined benefit or cash balance plan can push tax-deferred contributions to $200K-$300K+ annually. This is the single largest tax reduction strategy available.

Timing and Income Shifting

Business owners control when income is recognized and expenses are deducted. Strategic timing around year-end, income deferral through retirement plans, and expense acceleration can smooth tax liability across years and keep you in lower brackets. This flexibility is unavailable to W-2 employees.

Implementation

Proven Strategies

S-Corporation Tax Election

Convert your LLC or sole proprietorship to S-Corp taxation to separate business income into salary (subject to payroll taxes) and distributions (not subject to payroll taxes). Pay yourself a reasonable salary, then take remaining profits as distributions to save 15.3% on the distribution portion.

Best for: Business owners with net profits exceeding $80K-$100K annually who can justify reasonable salary and handle S-Corp administrative requirements.

Example:

$400K business profit. Sole proprietor: $400K x 15.3% = $61K payroll tax. S-Corp with $150K salary: $150K x 15.3% = $23K payroll tax. Savings: $38K annually. Over 10 years = $380K+ saved.

Stacked Retirement Plan Strategy

Maximize tax-deferred savings by combining multiple retirement plans: Solo 401(k) for employee/employer contributions ($69K), plus a defined benefit or cash balance plan for additional $100K-$250K+ in annual contributions. Total tax-deferred contributions can reach $300K+ annually.

Best for: Established business owners with consistent high income who want to maximize retirement savings and reduce current taxes dramatically.

Example:

Business owner age 55, income $600K. Solo 401(k): $69K. Cash Balance Plan: $180K. Total deferred: $249K. At 37% bracket = $92K tax savings annually.

Augusta Rule Tax-Free Rental

Rent your personal residence to your business for up to 14 days annually without reporting the income. Your business deducts the rental expense, you receive tax-free income. Document fair market rental value and business purpose for each use (board meetings, retreats, planning sessions).

Best for: Business owners with suitable homes who hold legitimate business meetings and can document fair market rental rates.

Example:

Home fair rental value: $2,000/day. 14 days business use: $28K deduction to business. $28K tax-free income to you personally. At 37% bracket: $10.4K tax benefit.

Avoid These Pitfalls

Common Mistakes

Wrong Entity Structure

Many business owners stay as sole proprietors or single-member LLCs far too long, paying $20K-$50K+ annually in unnecessary self-employment taxes. Entity structure should be reviewed annually as income changes.

Underutilizing Retirement Plans

Most business owners contribute to a simple SEP-IRA when they could save $100K-$200K+ more annually through advanced retirement plan strategies. The tax savings from proper retirement planning often exceed all other strategies combined.

Missing QBI Deduction Opportunities

The Section 199A deduction has complex rules around income limits, specified service businesses, and W-2 wage limitations. Many owners miss partial or full deductions due to poor planning around these thresholds.

Questions

Common Questions

Here are the most common questions we receive about this topic.

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Generally when net business income exceeds $80K-$100K annually. Below this threshold, the payroll tax savings may not justify the administrative costs (payroll processing, quarterly filings, additional tax returns). Above $150K-$200K, S-Corp election becomes increasingly valuable. The calculation depends on your reasonable salary, state taxes, and administrative costs.

The IRS requires reasonable compensation for services performed. Factors include: industry standards for similar roles, time spent in the business, revenue and profitability, geographic location, and your qualifications. For most business owners, reasonable salary ranges from $75K-$250K depending on these factors. Too low invites IRS scrutiny; too high wastes payroll tax savings.

It depends on your business type. Specified Service Trades or Businesses (SSTB) like doctors, lawyers, consultants, and financial advisors see the deduction phase out between $191K-$241K (single) or $383K-$483K (married). Non-SSTB businesses retain the deduction at any income level, subject to W-2 wage and property limitations.

Far more than most realize. Solo 401(k): up to $69K (2024). Add a defined benefit plan: additional $100K-$250K+ depending on age. Cash balance plans offer predictable high contributions. Total annual contributions can exceed $300K for older business owners with sufficient income.

Rarely for most small business owners. C-Corp creates double taxation (corporate level and dividend level). However, C-Corp may make sense for: businesses planning to raise venture capital, businesses that will retain significant earnings for reinvestment, or businesses planning for qualified small business stock (QSBS) exclusion on eventual sale.

Ready to Reduce Your Tax Burden?

Every business situation is unique. Let us analyze your current structure and identify tax-saving opportunities specific to your situation.

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