If you run a small business, taxes are both a cost and a controllable variable. With a little structure—and the right elections—you can reduce your tax bill, smooth cash flow, and stay audit-ready. Use this guide as your playbook for the year.
1) Choose (or revisit) the right entity
Your legal structure drives how profits are taxed and how you pay yourself.
Sole Proprietor/LLC (disregarded): Simple to run; all profit is subject to income tax and generally self-employment (SE) tax.
S-Corporation (or LLC taxed as S-Corp): Profit can be split between reasonable salary (payroll/SE tax) and distributions (not subject to SE tax), plus potential 20% QBI deduction. Requires payroll and more formal bookkeeping.
C-Corporation: Flat corporate tax rate; dividends taxed again at the shareholder level. Can be attractive for retained earnings, health/benefit strategies, or specific exit plans.
Action: Model 2–3 scenarios (current vs. S-Corp vs. C-Corp) using your last 12 months of results. Re-evaluate annually or after major profit changes.
2) Get your accounting method and books audit-ready
Clean books = better decisions, better deductions, and faster prep.
- Cash vs. Accrual: Many small businesses can choose. Accrual is clearer for inventory/long projects; cash can be simpler for services.
- Chart of Accounts: Separate revenue streams; split COGS vs. operating expenses.
- Close monthly: Reconcile bank/credit cards, record owner draws vs. payroll, tag capital purchases.
- Receipt discipline: Use a receipt app; annotate business purpose and attendees for meals/entertainment.
Action: Create a monthly close checklist. No month closes without bank recs and AR/AP aging reviewed.
3) Optimize owner compensation (S-Corp owners especially)
- Reasonable salary: Document how you set it (industry surveys, role/time split). Underpaying invites scrutiny; overpaying costs payroll tax.
- Accountable plan: Reimburse business expenses paid personally (home office, internet, mileage, cell phone) tax-efficiently.
- Health benefits: Consider QSEHRA/ICHRA or a group plan depending on headcount/goals.
Action: Put a one-page “reasonable comp” memo in your corporate file and adopt an accountable plan policy.
4) Leverage deductions and credits you might be missing
Section 179 & bonus depreciation: Accelerate write-offs for qualifying equipment, vehicles, software. Match purchases to profit outlook.
Home office: If exclusive and regular use, deduct a portion of housing costs (or use simplified method).
Vehicle deductions: Track business miles. Decide between actual expenses vs. standard mileage.
Start-up/organization costs: Elect to deduct allowable amounts in year one.
R&D credit (yes, even for small firms): Qualifying development, prototyping, software work may count.
State pass-through entity (PTE) tax: Many states allow an election to bypass the federal SALT cap via entity-level tax (state-specific rules).
Retirement contributions: See next section—often the biggest legal shelter for owners.
Action: Maintain a “capital spend” list with dates, costs, and business purpose; tag assets in your books when purchased.
5) Build a tax-smart retirement stack
Retirement plans reduce current tax and grow wealth.
- Solo 401(k): Great for owner-operators (and spouse employees). Allows employee deferrals + employer profit-sharing; Roth options increasingly common.
- SEP-IRA: Easy to administer; contributions are employer only (pro-rata for eligible employees).
- Defined Benefit/Cash Balance plans: For consistent high income, these can turbo-charge deductions; pair with a 401(k) for layering.
Action: Decide your target contribution by June so payroll and cash flow can align.
6) Plan quarterly—avoid penalties and surprises
Underpaying during the year triggers penalties; overpaying hurts cash flow.
- Quarterly estimates or payroll withholding should reflect your current profit trend.
- Re-forecast each quarter; adjust estimates for new contracts, equipment buys, or ownership changes.
- If you had a windfall, consider a safe harbor strategy vs. full “pay-as-you-go.”
Action: Book a 30-minute review after you close each quarter to adjust withholdings/estimates.
7) Manage inventory and cost of goods intelligently
- Choose a consistent method (FIFO, specific ID) and apply it correctly.
- Track landed costs (freight/duties) so margins are accurate.
- Count at least annually; shrinkage/obsolete stock should be recognized early.
Action: Implement lightweight SKU discipline—SKU naming rules, reorder points, and a quarterly spot count.
8) Sales tax, 1099s, payroll: stay compliant
- Sales tax nexus can arise from physical presence, employees, or online sales thresholds. Register before you collect.
- 1099-NEC/1099-MISC: Collect W-9s before paying contractors; file in January.
- Payroll: On-time deposits and returns; keep officer payroll formal for S-Corps.
Action: Build a compliance calendar (see template below) and assign an owner.
9) Year-end moves that actually move the needle
- Income/expense timing: Pull expenses into high-profit years; push revenue when appropriate.
- Gain/loss harvesting: Coordinate with personal return to manage brackets/phase-outs.
- Charitable strategy: Donor-Advised Funds let you bunch giving into one tax year while granting over time.
- Board minutes & resolutions: Paper the big decisions (entity elections, compensation changes, large purchases).
Action: Hold a brief year-end board meeting (even if it’s just you) and minute the decisions.
Owner’s checklist (print this)
Quarterly
- Close books & reconcile accounts
- Update rolling tax projection & estimates
- Review payroll vs. reasonable comp
- Sales tax & compliance tasks complete
Mid-year (June/July)
- Select retirement plan target and fund schedule
- Capex plan (179/bonus) aligned to profit forecast
- Review entity choice/QBI impact for the year
Year-end (Nov/Dec)
- Finalize income/expense timing
- Gain/loss and charitable strategy executed
- Board minutes; W-9s on file; 1099 list ready
Common red flags (fix these first)
- Co-mingled personal and business spending
- No receipt trail for meals, travel, or home-office
- Paying owners as contractors when you elected S-Corp
- Missing W-9s → late 1099s
- Inventory that “never changes” year to year
Example: Accountable plan memo (mini-template)
Company: [Your Company, LLC]
Effective date: [MM/DD/YYYY]
The company will reimburse employees/owners for ordinary and necessary business expenses under an accountable plan. Reimbursements require: (1) business purpose, (2) substantiation within 60 days, and (3) return of excess advances. Covered categories include home office (allocable), internet/phone (business portion), mileage or actual vehicle costs (choose one method per year), and other substantiated expenses.
The bottom line
Tax planning isn’t a once-a-year scramble—it’s a rhythm. With the right entity, clean books, smart compensation, and a quarterly projection, you’ll capture the deductions you earn and avoid costly surprises.
If you’re in Southern Utah, Thompson Tax & Trust can model these strategies with your actual numbers—entity choice, payroll mix, retirement plan selection, 179/bonus, and state elections—then keep you compliant. Book a quick consult and let’s keep more of what matters.
Disclaimer: This article is general information, not tax advice. Rules change and your situation is unique—consult a tax professional before acting.
