As a small business owner, you’re probably always on the lookout for ways to reduce your tax bill without crossing any legal lines. And what do you know? There are plenty of tax loopholes small business owners simply don’t know!
In 2024, there are plenty of tax strategies that can help you save big, but it is important to approach them wisely to steer clear of any legal issues. Today, we’ll take a look at some of the most popular tax loopholes and strategies that could help your business save money!
6 tax loopholes to reduce your taxable amount
1. Know your charitable contributions
Here’s a smart tax strategy that can benefit both you and your business! As a business owner, you can make donations to charity—and the best part? These donations are tax-deductible! Plus, in some cases, you or your business might even benefit personally from them. Personal benefits could include things like public recognition, invitations to charity events, or other perks.
Being seen as a charitable organization can do wonders for your business’s image! Not only are you making a positive impact, but you're also boosting your reputation and gaining some solid public relations and marketing benefits. People love to support businesses that give back.
But, a quick word of caution: the rules around charity donations and personal benefits are quite strict. You’ll want to make sure that any personal benefit you receive aligns with the guidelines.
2. Employ your spouse
Hiring your spouse or giving them a share in the business is another common tax strategy you can use. This can be a great way to save on taxes by shifting some income or profits to family members, which might lower your overall tax bill.
For example, if you hire your spouse, their salary can be counted as a business expense, which can reduce your taxable income. Or, if you give them shares in the business, they can benefit from the company’s profits, and you won’t have to take on the full tax responsibility.
Of course, like with any tax strategy, it’s important to play by the rules. Make sure to speak with an accountant to ensure everything is set up right and that you’re not stepping on any legal toes.
3. Avoid paying self-employment tax
Self-employment tax can feel like a heavy burden for small business owners. It covers Social Security and Medicare, and it’s a cost many don’t anticipate when starting out. But the good news? As a business owner, you have options to reduce this tax significantly.
Claim every deduction you can. Start by maximizing your business deductions. Every dollar you deduct reduces your net taxable income, and since SE tax is based on your profit, less profit means less tax.
Or you can switch to an S-Corp. Instead of operating as a sole proprietor or partnership, consider electing S-Corp status for your business. S-Corps have a unique advantage: they’re not subject to self-employment tax.
Imagine you earn $150,000 as a sole proprietor. You’d owe almost $23,000 in self-employment tax alone. Now, if you switched to an S-Corp and paid yourself a $60,000 W-2 salary, you could save $13,820 in taxes.
The takeaway? Combine strategic deductions with the right business structure, and you can keep more of your hard-earned money in your pocket.
4. Setting Up a Company in a Tax Haven
Did you know that there are tax havens right here in the United States? Certain states offer incredibly business-friendly tax laws that can help you reduce your tax burden without needing to navigate the complexities of international tax rules.
For example, states like Wyoming, Nevada, and South Dakota are known for their lack of corporate income taxes and, in some cases, personal income taxes too. These states also have low filing fees and strong privacy protections for business owners, making them especially appealing to entrepreneurs looking to cut costs and protect their assets.
But before you rush to set up shop in one of these tax-friendly states, there are a few things to keep in mind:
- Nexus Rules: Even if your business is registered in a tax haven state, you may still owe taxes in the state where your business operates or earns income. Make sure you understand “nexus” rules, which determine where your business has a tax obligation.
- Business Structure: Certain structures, like LLCs or corporations, may offer better advantages depending on the state. Choose wisely to maximize the benefits.
5. De Minimis Fringe Benefits
Chances are, you’ve never heard of this term in your life. De minimis fringe benefits refer to small gifts you can give to your employees without it coming within your taxable income! The best part is that you can gift yourself something too and not have to pay any tax for it.
Examples of de minimis fringe benefits include:
- Coffee, snacks, or meals
- Personal use of business property
- Traditional holiday gifts like turkey or candy
- Tickets to entertainment events and concerts
- Apparel like t-shirts
- Occasional parties and picnics
- Flowers
- Books
The only thing you must keep in mind is that your gifts must be occasional, non-cash, and low in value. So keep it within $100 per employee and you’ll be good to go!
Pro tip: Use receipt management tools like Receiptor AI to help track and record these small receipts, although small, they add up quickly to significant amounts on your taxes.
6. Maximizing Deductible Expenses
One of the easiest ways for small business owners to cut down on taxes is by making sure they’re taking full advantage of deductible business expenses. These expenses can really add up, helping to lower your taxable income and, in turn, reducing the amount of tax your business has to pay. It’s a simple strategy that can make a big difference!
So what counts as a deductible expense? Here are some of the top tax write-offs you can claim:
- Office supplies such as paper, pens, printers, and other office materials
- Business travel expenses like flights, hotels, and 50% on travel meals.
- Subscriptions to business-related software or online services (e.g., accounting software, project management tools).
- Advertising and marketing costs related to running digital ads, printing business cards, or paying for a website.
- Employee salaries and benefits like health insurance, retirement plan contributions, and bonuses.
- Home office expenses such as a portion of your rent or mortgage, utilities, internet, and phone bills can be deducted.
Final Thoughts
As a small business owner, there are plenty of ways to reduce your tax bill without getting into trouble. Whether it's charitable donations, employing family members, or maximizing deductible expenses, these strategies can help you save money.
Tax rules can be tricky so it’s a wise decision to double-check with an accountant to make sure you're on the right track. Worried about missing a deductible expense? Sign up for a free trial with Receiptor AI and make organizing receipts and tracking expenses a breeze!
