How Small Businesses Can Reduce Their Income Taxes

Running a small business means you control decisions a salary earner cannot: what entity you use, how you pay yourself, when you recognize income, when you buy equipment. Each of those decisions has a tax consequence, and making them with the tax outcome in mind is not a gray area. It is what tax planning is.

The taxes in play for most small business owners are federal income tax at whatever bracket applies, state income tax in most states, and self-employment or payroll tax on earned income. Reducing any of them is fair game as long as the position is accurate and defensible.

Entity structure: the S-corp election

If you operate as a sole proprietor or a single-member LLC treated as a disregarded entity, you pay self-employment tax on every dollar of net profit. That is 15.3 percent up to the Social Security wage base of $184,500 in 2026, then 2.9 percent above it.

An S-corp changes the calculation. As an S-corp owner-employee, you pay yourself a W-2 salary, which is subject to payroll tax. Profit distributions beyond the salary are not. On $120,000 in net profit, a sole proprietor pays self-employment tax on the full amount. An S-corp owner paying themselves an $80,000 reasonable salary pays payroll tax on that amount only. The remaining $40,000 comes out as a distribution, avoiding both the employer and employee sides of FICA.

The break-even is usually around $50,000 to $60,000 in net profit. Below that, the cost of running payroll and filing a corporate return typically offsets the savings. The IRS requires the salary to be reasonable, meaning comparable to what you would pay someone else to do the same work.

Equipment deductions: Section 179 and bonus depreciation

Normally a large equipment purchase is deducted a little at a time over years, following IRS depreciation schedules. Two provisions let you pull that deduction forward to the year you buy the asset.

Section 179 is elective. You can take up to $2,560,000 in total for 2026, with the deduction phasing out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000. Section 179 cannot exceed your business income for the year; it cannot create a loss. Bonus depreciation under the OBBBA is 100 percent and permanent for qualifying property acquired after January 19, 2025. Unlike Section 179, bonus depreciation can push you into a loss, which then carries forward to offset future taxable income.

Qualifying property generally includes computers, tools, machinery, vehicles used for business, and off-the-shelf software. The key requirement is that the asset is placed in service during the tax year and used more than 50 percent for business.

Retirement plans

A retirement plan lets you move income from this year's tax return into deferred savings. For a small business owner, you can often fund both sides.

A Solo 401(k) allows a $24,500 employee deferral in 2026 plus an employer contribution of up to 25 percent of compensation. The combined limit is $72,000 under 50, $80,000 at 50 to 59, and $83,250 at 60 to 63. A SEP-IRA is simpler and allows contributions up to 25 percent of compensation, capped at $72,000 for 2026. A SIMPLE IRA is an option if you have employees; it costs less to administer but has lower limits.

Every dollar contributed is a deduction against taxable income. If you are in the 24 percent federal bracket, a $20,000 retirement contribution is $4,800 less federal income tax, plus whatever state income tax applies.

The QBI deduction

The qualified business income deduction, made permanent by the OBBBA in July 2025, lets eligible pass-through business owners deduct up to 20 percent of net business income. Pass-through entities include sole proprietorships, single-member LLCs, partnerships, and S-corps.

For most small businesses below the income thresholds, the deduction applies automatically. The income thresholds in 2026 are approximately $201,750 for single filers and $403,500 for joint filers. Above those levels, specified service trade or business owners, which covers professions like law, accounting, consulting, and finance, see the deduction phase out. A 20 percent deduction is substantial: on $100,000 of qualified business income, it is $20,000 removed from the income you pay tax on.

An accountable plan

If you use part of your home for business, drive your personal car for work, or pay out of pocket for business travel, an accountable plan is the mechanism for turning those costs into deductible business expenses without creating a taxable event.

Under an accountable plan, the business reimburses you for documented expenses, and the reimbursement is not wages, not subject to payroll tax, and not reportable as income to you. Without the plan, the same payment would be taxable compensation on both ends. The IRS requires three things: the expense must have a business connection, it must be substantiated with documentation, and any excess must be returned. A written plan is required.

Timing income and expenses

A cash-basis small business recognizes income when it is received and deducts expenses when they are paid. That gives you some ability to shift money across tax years. If this year's income is high, accelerating deductions and deferring income where possible can keep you in a lower bracket. Paying a January bill in December, prepaying a software subscription, making a large equipment purchase, or accelerating a retirement contribution all move deductions into this year.

This does not mean manufacturing transactions to manipulate income. It means making purchases and payments you need to make anyway at the time that helps your tax situation rather than a time that does not.

How Vuuv helps

Most of what this guide describes requires knowing your numbers in real time. A surprise deduction you think of in March after the books are closed is harder to act on than one you see in November when you can still do something about it. Vuuv keeps your income and expenses categorized as they come in, generates Schedule C and other reports on demand, and stores receipt images alongside the transactions they belong to.

This article is general information, not tax advice. Tax rules change and every situation is different. Confirm the details against current IRS guidance or talk to a qualified tax professional before you file.