Structure Your Business Properly to Significantly Lower Your Taxes
Knowing how to structure your business to save on taxes in 2025 is essential if you want to reduce your tax burden and keep more of your income. Recent changes in U.S. tax laws, such as the Tax Relief for American Families and Workers Act and the Inflation Reduction Act, have introduced new provisions that may impact your tax strategy. Different structures have different tax implications. Selecting the best one ensures you keep more of your hard-earned money.
Consider These Business Structures
Sole Proprietorship
- Simple to set up and operate
- Profits are taxed as personal income
- No legal separation between you and your business
- Example: Sarah runs a freelance graphic design business as a sole proprietor. She reports all her earnings on her personal tax return but pays self-employment taxes on the full amount.
Want to make sure you’re not leaving money on the table? Read Why Are So Many Tax Refunds Unclaimed? to uncover what you might be missing.
Partnership
- Easy to form with shared responsibilities
- Pass-through taxation, meaning profits flow to individual tax returns
- Partners are personally liable for business debts
- Example: Mike and James start a small consulting firm. As partners, they split profits and report them on their personal tax returns, avoiding corporate taxes.
Limited Liability Company (LLC)
- Offers liability protection
- Profits pass through to owners, avoiding corporate taxes
- Allows flexibility in taxation (can be taxed as a sole proprietorship, partnership, or corporation)
- Example: Lisa forms an LLC for her e-commerce business. She elects to be taxed as an S-Corp to save on self-employment taxes while protecting her personal assets.
S Corporation (S-Corp)
- Pass-through taxation reduces self-employment taxes
- Shareholders take salaries and receive distributions
- Strict eligibility requirements
- Example: John owns a marketing agency and elects S-Corp status. He pays himself a reasonable salary and takes additional profits as distributions, lowering his overall tax burden.
C Corporation (C-Corp)
- Profits are taxed at the corporate level
- Owners pay taxes on dividends (double taxation)
- Best for businesses planning to reinvest profits or go public
- Example: A tech startup raises venture capital funding and forms a C-Corp to attract investors and reinvest profits into business growth.
Strategies to Minimize Taxes
If you’re wondering how to structure your business to save on taxes in 2025, it starts with choosing the right entity and using the tax code to your advantage. The strategies below can make a major impact on your bottom line.
Elect S-Corp Status If you’re an LLC, electing S-Corp status can help you save on self-employment taxes. Instead of paying self-employment taxes on all profits, you take a reasonable salary and pay taxes only on that amount. The rest can be distributed as dividends, which are not subject to self-employment tax.
- Example: Maria owns a photography business. As an LLC, she was paying self-employment tax on all earnings. After switching to an S-Corp, she pays herself a salary of $50,000 and takes an additional $30,000 as distributions, reducing her tax liability.
Deduct Business Expenses
Reduce taxable income by writing off eligible expenses. Common deductions include:
- Office rent
- Equipment purchases
- Employee wages
- Marketing costs
- Business travel and meals (subject to IRS limitations)
- Home office expenses if you qualify
- Professional services such as accounting and legal fees
- Example: A real estate agent deducts vehicle mileage, advertising costs, and office supplies, reducing taxable income by $10,000.
Use the Right Retirement Plan
Contribute to a retirement account to lower taxable income. Options include:
- SEP IRA (ideal for self-employed individuals)
- Solo 401(k) (great for business owners with no employees)
- Traditional 401(k) (for larger businesses with employees)
- Defined benefit plans for high-income earners
- Example: A self-employed IT consultant contributes $20,000 to a solo 401(k), reducing taxable income while building retirement savings.
Leverage the Qualified Business Income (QBI) Deduction
If you operate as a pass-through entity, you may qualify for up to a 20% deduction on business income. Eligibility depends on income level and business type. Consult with a tax professional to ensure you’re maximizing this deduction.
- Example: A law firm operating as an S-Corp qualifies for the QBI deduction, reducing taxable income by $15,000.
Hire Family Members
If you employ your children or spouse, you can shift income into lower tax brackets. Payments to children under 18 are not subject to Social Security or Medicare taxes if structured correctly. Plus, they can contribute to a Roth IRA, securing their financial future early.
- Example: A bakery owner hires her teenage son to manage social media, paying him $12,000 per year. He pays little to no taxes, and she deducts his salary as a business expense.
Want more insights? Learn the rules and benefits of this strategy in Hiring Your Child in Your Family Business.
Take Advantage of Depreciation
Write off large purchases like equipment or vehicles through accelerated depreciation. Section 179 allows you to deduct the full cost of qualifying assets in the year they’re placed in service. Bonus depreciation may also be available for larger purchases.
- Example: A construction company purchases new machinery for $50,000 and deducts the full amount in the current tax year using Section 179 depreciation.
Consider a Health Savings Account (HSA)
If you have a high-deductible health plan, contributing to an HSA allows you to save for medical expenses with pre-tax dollars. The contributions reduce your taxable income, and withdrawals for qualified medical expenses are tax-free.
- Example: A small business owner contributes $7,750 to an HSA, lowering taxable income while covering future medical expenses tax-free.
Learn More About Tax Planning
Looking for more ways to avoid common tax traps and strengthen your financial strategy? Check out these helpful articles from Provident CPAs:
- Common Tax Mistakes to Avoid this Filing Season
- Avoid That Dreaded Letter from the IRS
- Advice for New Business Owners
- A Guide to Capital Expenditures and Tax Implications
These resources can help you deepen your understanding and avoid pitfalls that cost business owners time and money.
Questions to Ask Yourself
- Are you paying more self-employment taxes than necessary?
- Can you adjust your structure to take advantage of pass-through taxation?
- Are you missing out on deductions that could lower your tax bill?
- Have you explored tax-advantaged retirement savings options?
- Are you planning for a tax-efficient business exit strategy?
Want personalized guidance on how to structure your business to save on taxes in 2025? Talk to a professional who understands the tax code and can help you make informed, money-saving decisions.
Choosing the right business structure isn’t just about liability protection. It’s a key strategy for keeping more of your income. Work with a tax professional to ensure you’re maximizing savings and staying compliant.
At Provident CPAs, we specialize in helping clients adapt to changing economic conditions. Whether you’re a business owner or an individual looking to optimize your tax strategy, our team is here to guide you through the complexities of today’s tax landscape. Contact us today to learn more about how we can help you achieve financial independence, even in the face of economic uncertainty.