For educational purposes only. Tax law changes frequently and individual circumstances vary. This article reflects general principles — confirm current figures, limits, and eligibility rules with a licensed CPA before acting. The strategies here are a starting point for a planning conversation, not a substitute for professional advice.
Most business owners think about taxes in April. The ones who pay less think about them in January — or better yet, the year before it.
Tax planning isn't about finding loopholes. It's about making deliberate decisions at the right time. A deduction you didn't take, a retirement contribution you forgot to make, or an entity structure you never updated can cost thousands of dollars in taxes you simply didn't have to pay.
This checklist covers nine areas where proactive planning consistently makes a material difference. Work through it now — before year-end pressure sets in and the windows start closing.
1. Review Your Entity Structure
The entity you started your business under isn't permanent, and what made sense when you were earning $80,000 may be costing you money at $250,000. Entity structure is one of the highest-leverage planning decisions a business owner can make — and one of the most frequently ignored.
S-Corporation election
If you operate as a sole proprietor or single-member LLC and your net profit has grown significantly, an S-Corp election may meaningfully reduce your self-employment tax exposure. By splitting business income between a reasonable W-2 salary and owner distributions, only the salary portion is subject to payroll taxes (Social Security and Medicare). At higher profit levels, the annual payroll tax savings can far exceed the added compliance cost.
IRS scrutiny note: S-Corp owner-employees must pay themselves a "reasonable compensation" — what a hypothetical employer would pay for the same services. Underpaying yourself to minimize payroll taxes is a well-documented audit trigger. Document your salary rationale in writing each year.
When to revisit your entity choice
- Your net profit has grown materially since formation
- You've added or removed partners, members, or investors
- You're planning a sale, investment round, or succession
- Your state has introduced a pass-through entity tax election (covered in section 8)
- You've heard "you should probably be an S-Corp" but never modeled the actual numbers
Schedule a 30-minute entity review with your CPA if any of the above applies. The math takes minutes — the delay in having the conversation is what costs money.
2. Maximize Retirement Contributions
Retirement accounts are among the most powerful tax reduction tools available to business owners — they legally defer income, reduce your current-year tax bill, and build long-term wealth simultaneously. Yet many business owners leave significant deductions on the table each year simply because they didn't act before year-end or haven't chosen the right vehicle.
SEP-IRA
Simple to open, with no annual filing requirement. Contributions can be made up to the extended due date of your return, which means you can decide in April how much to contribute for the prior year. The contribution limit is a percentage of net self-employment income. If simplicity is the priority and you have no employees, this is the lowest-friction option.
Solo 401(k)
Available to self-employed individuals with no full-time W-2 employees other than a spouse. The Solo 401(k) allows both an employee deferral and an employer profit-sharing contribution, resulting in a higher potential contribution ceiling than a SEP-IRA at lower and moderate income levels. The plan must be established before December 31 of the year you want to contribute for — contributions themselves can follow later.
SIMPLE IRA
Available to businesses with employees. Lower individual contribution limits than a Solo 401(k), but easier to administer than a full 401(k) plan. Requires an employer match or non-elective contribution, which makes it a real cost — but also a retention tool.
Defined Benefit Plan
For established, high-earning business owners who want to shelter significantly more than defined contribution limits allow. Actuarially determined contributions can reach six figures annually. These plans are complex and costly to administer — but at the right income level, the tax savings justify both.
Tip: If you have a Solo 401(k) and haven't maxed the employee deferral portion yet, that's the first dollar to contribute — the deferral limit is substantially higher than the SEP-IRA limit at the same income level for many owners.
Review what retirement vehicles you currently have open, confirm contribution limits for 2026, and determine whether you're on track to maximize them. If you have no plan in place, act now — Solo 401(k) plans must be established before December 31.
3. Stay Current on Estimated Tax Payments
Underpayment penalties are quiet, avoidable, and surprisingly common among business owners who had a good year. The IRS requires you to pay taxes as you earn income — not just at filing time. If you owe more than $1,000 at filing and haven't met the safe harbor threshold, you'll pay a penalty even if you write the check on time and in full.
The safe harbor rules
You can generally avoid underpayment penalties by paying the lesser of:
- 100% of the prior year's total tax liability (110% if your prior-year AGI exceeded $150,000), or
- 90% of the current year's actual tax liability
Where business owners routinely get caught
- Basing quarterly estimates on last year's income when this year's income has grown materially
- Forgetting to account for self-employment tax alongside income tax — SE tax is often the larger number for sole proprietors
- Missing a quarterly deadline (April 15, June 15, September 15, January 15)
- Assuming a large refund last year means you're safe this year
Review your Q1–Q3 estimated payments and compare to your expected full-year liability. If your income has increased significantly, catching up before the January 15 deadline is far cheaper than absorbing a penalty at filing.
4. Time Your Income and Deductions Strategically
Cash-basis taxpayers — the majority of small businesses — have meaningful control over when income and expenses land in a tax year. Used deliberately, this timing can shift income into lower-rate years and pull deductions into higher-rate ones.
Defer income where it makes sense
- Delay sending invoices for work completed late in December if the cash payment would fall in January anyway
- For large asset dispositions, consider an installment sale to spread the gain over multiple tax years
- If you expect to be in a lower bracket next year (due to business changes, large deductions, or retirement contributions), defer income accordingly
Accelerate deductions before December 31
- Prepay deductible business expenses — rent, software subscriptions, insurance premiums, supplies
- Make planned charitable contributions from your business accounts now
- Purchase equipment you were going to buy in Q1 anyway and capture the depreciation this year
- Pay estimated state income taxes before year-end (subject to SALT cap at the individual level — see section 8 for the business-level workaround)
Important: Don't manufacture transactions purely for tax timing. The expense or purchase must be legitimate, necessary, and useful to the business. Accrual-basis taxpayers follow different rules here — confirm the right approach with your CPA before prepaying anything significant.
Review your December cash flow and identify any large expenses planned for early next year that could reasonably be moved forward. Then model both scenarios with your CPA before acting.
5. Use Section 179 and Bonus Depreciation
Normally, the cost of a business asset is deducted over its "useful life" — five, seven, fifteen years depending on the asset class. Section 179 and bonus depreciation allow you to accelerate that deduction, sometimes expensing the entire cost in the year of purchase rather than spreading it out over years.
Section 179 expensing
Allows immediate expensing of qualifying business property — equipment, machinery, computers, office furniture, and certain software. Subject to an annual dollar limit and a business income limitation: you cannot use Section 179 to create a net operating loss. Unused Section 179 can be carried forward to a future year.
Bonus depreciation
Allows an additional first-year depreciation deduction on qualifying property — historically a percentage of the asset's cost. Unlike Section 179, bonus depreciation can create or increase a loss. The applicable percentage has been subject to legislative changes; confirm the current 2026 rate with your CPA before relying on it in your projections.
Vehicle considerations
Business vehicles are subject to a separate, more restrictive set of rules. Heavy SUVs and trucks (over 6,000 lbs gross vehicle weight rating) have a higher Section 179 ceiling than standard passenger vehicles. If you're planning a vehicle purchase, the make, model, weight class, and timing all affect your deduction — get specifics from your CPA before buying.
Tip: Equipment placed in service by December 31 qualifies for the current year — it doesn't need to be paid for in full. If you're financing a purchase, the asset still qualifies as long as it's in service before year-end.
List any equipment or asset purchases you're planning for Q1. Compare buying before vs. after December 31 with your CPA — the depreciation difference can be significant, especially if your income is unusually high this year.
6. Confirm Your Qualified Business Income (QBI) Deduction
The QBI deduction (Section 199A) allows eligible pass-through business owners — sole proprietors, S-Corp shareholders, and partnership partners — to deduct up to 20% of qualified business income from federal taxable income. At the 32% bracket, a 20% QBI deduction on $200,000 of business income represents roughly $12,800 in tax savings. It's one of the larger deductions on many returns, and one of the most frequently miscalculated.
The limitations that matter most
- Specified service trades or businesses (SSTBs): Businesses in health, law, accounting, actuarial science, consulting, financial services, and certain other fields phase out of the QBI deduction at higher income levels. If your taxable income exceeds the threshold, the deduction reduces and eventually disappears entirely for SSTBs.
- W-2 wage and capital limitations: At higher income levels, the deduction is also limited based on W-2 wages paid by the business and/or the unadjusted basis of qualified property. This is why entity structure and payroll decisions interact with QBI planning.
- Legislative status: The QBI deduction was a TCJA provision subject to expiration. Confirm its current availability and any modifications for 2026 with your tax advisor.
If you haven't specifically discussed QBI eligibility with your CPA — or if your income, structure, or business type has changed — add it to your next planning meeting. Small changes in how income is structured can meaningfully affect the deduction.
7. Review S-Corp Reasonable Compensation
If you elected S-Corp status, your W-2 salary is arguably the most scrutinized number on your return. Too low, and you're exposed to payroll tax reclassification — the IRS can reclassify distributions as wages and assess back taxes, penalties, and interest. Too high, and you're voluntarily overpaying FICA taxes without any corresponding benefit.
What "reasonable" actually means
The IRS defines reasonable compensation as what a hypothetical employer would pay for the same services in the same market. Common benchmarks include:
- Industry salary surveys (BLS, RSMeans, trade associations)
- What you have paid — or would pay — employees doing comparable work
- What similar businesses in your region pay for the same role
- The time you actually spend working in the business vs. as an investor
Document your salary rationale in writing each year — a brief memo noting the role, hours, comparable market rates, and the source you used. This documentation is your first line of defense in an IRS inquiry and takes fewer than 30 minutes to prepare.
If your business income has grown significantly since you last set your salary, review it before year-end. An adjustment made mid-year or before December 31 is cleaner than an amended payroll after the fact.
8. Evaluate the Pass-Through Entity Tax Election
The $10,000 federal cap on state and local tax (SALT) deductions has been a significant pain point for business owners in high-tax states since 2018. Many states have responded with a Pass-Through Entity (PTE) tax election — and for the right business, it's one of the most valuable planning tools currently available.
How it works
A PTE election allows an S-Corp or partnership to pay state income tax at the entity level rather than passing the tax liability through to individual owners. That entity-level state tax payment is then deductible as a business expense on the federal return — bypassing the $10,000 SALT cap entirely. The partners or shareholders receive a credit against their own state tax liability for the amount paid by the entity.
For a business in a state like Virginia, Maryland, New York, or California with owners already over the SALT cap, the federal deduction recovered through a PTE election can be worth thousands of dollars per year per owner.
What to confirm before acting
- Whether your state offers a PTE election and its specific mechanics
- The election deadline — some states require it to be made by a specific date during the tax year
- Whether all partners/shareholders are affected similarly (the election applies to the entire entity)
- How the credit flows to individual returns and whether it creates any complications
If you're an S-Corp or partnership owner in a state with a PTE election and you haven't made it yet, check the deadline immediately. This is one of the few planning elections where missing the window means waiting a full year to act.
9. Year-End Housekeeping
Strategy matters, but so does the operational groundwork. These items don't require planning decisions — they require time and attention before December 31.
Accounts receivable
Review all outstanding invoices. If any are genuinely uncollectible — the client has closed, gone unresponsive, or is in bankruptcy — write them off before year-end. Accrual-basis taxpayers can deduct the bad debt in the year it becomes worthless; cash-basis taxpayers never included the income in the first place, so there's nothing to deduct. Know which applies to you.
Inventory assessment
If you carry inventory, conduct a physical count before year-end and write down any obsolete, damaged, or unsellable items to their net realizable value. The write-down is a deductible loss.
Asset disposals
Dispose of fully depreciated or worthless business assets before December 31. Simply stopping use of an asset doesn't create a deductible loss — you need an actual disposal event, documented in writing.
1099 preparation
Compile contractor payment records now. 1099-NEC forms are due to recipients by January 31. Starting in December prevents missing the deadline and avoids the scramble of tracking down addresses and tax IDs in January.
Document everything
Deductions that aren't documented aren't defensible. Before year-end, gather and organize:
- Receipts for business meals (noting business purpose and attendees)
- Mileage logs for vehicle use (date, destination, business purpose, odometer readings)
- Home office measurements and utility bills if claiming the home office deduction
- Business-use percentages for any mixed-use assets (phones, computers, vehicles)
Block two hours on your calendar before December 31 to work through this list — ideally with your bookkeeper, or directly in your accounting software. Documentation gathered now is far more reliable than records reconstructed in March.
Tax planning works best as a conversation, not a checklist. Every item above carries nuances that depend on your income level, entity structure, home state, and goals — and the interaction between items is often where the real savings live. A retirement contribution affects your QBI deduction. Your S-Corp salary affects your payroll tax savings and your SALT deduction under a PTE election. None of these decisions exist in isolation.
If you'd like to work through this checklist against your actual numbers — and find out which items are worth the most to your specific situation — we'd be glad to help.
