Have you experienced filing your tax return with the IRS only to see that you owe a massive amount of taxes? The average small business pays 19.8% of its annual gross income in taxes. 🤯
Luckily, there are a few small business tax loopholes that have been used legally for years, and new ones are found every year, too! These loopholes help thousands of business owners discover tax savings each year. 😮💨
Keep reading for eight popular and widely-used tax loopholes that entrepreneurs and small business owners use every tax year to reduce their income tax or maximize their tax deductions.
Disclaimer: This article has been reviewed by a Certified Public Accountant (CPA). 💚 However, we always recommend working with your own tax professional or CPA when filing your business taxes. That’s the best way to stay out of trouble with the IRS—while legally saving on taxes where you can!
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Live: How to Grow Your Business Without Chasing More Clients
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What is a small business tax loophole? 🤔
Tax loopholes are legal ways that tax laws and tax codes are used to reduce your tax burden. These laws’ shortcomings or provisions can help cut the amount you owe on your small business tax bill and/or reduce your tax liability.
Keep in mind that remaining compliant and law-abiding with your taxes is the most important thing when looking for tax loopholes. When in doubt, talk to a tax professional or your accountant.
💡Looking for more tax advice? Read our favorite CPA-approved small business tax tips here.
Tax Loophole #1: Write off your personal expenses 🪪
Did you know that some of your personal expenses actually count as business expenses? These small business write-offs can save you hundreds to thousands in taxes a year if you play your cards right.
One type of personal expense that can be a business write-off is your rent, in the form of a home office deduction. This deduction is for those who regularly use part of their home or property as their primary place of business or for business purposes, including both renters and homeowners, and including home types such as traditional homes, condominiums, and apartments. 🏠
Another expense that can be deducted is business travel expenses. If you take a trip where most of your time is spent on business activities, your flights, hotel stay, and even meals are considered business tax deductions.
Remember that the tax deductions for travel expenses must be ordinary and necessary and can’t be for primarily personal purposes. You can read more about personal taxes versus business taxes here.
Your phone, internet bill, and other technology like laptops and computers can be tax deductible too if you need them for business purposes! Again, they must be ordinary and necessary and used for your business. 💻
What can’t you deduct? ❌
Unfortunately, gym fees are generally never deductible for tax purposes. Capital gains may have to do with your taxes, but muscle gains don’t! 💪
In addition, business bank account fees are deductible if you have a business checking or savings account—but not for your personal bank account.
The good news? With Relay (that’s us!), you won’t have to worry about business bank account fees. Relay’s fee-free checking accounts and banking platform are perfect for small business owners, freelancers, and entrepreneurs alike. 🫶
Tax Loophole #2: Elect as an S-corp 🤵
An S-corporation (S-corp) is a company that passes corporate income, losses, deductions, and credits to its shareholders for tax purposes. There are several requirements for becoming an S-corp, and it’s different than being a sole proprietor or limited liability company (LLC). Make sure to do your research and talk to your accountant before you file to become an S-corp.
The S-corp business structure comes with several tax benefits. Qualifying S-corps don’t pay federal taxes at the corporate level and shareholders of the company can be employees of the business and draw salaries as employees. You’ll also avoid paying self-employment tax on all earnings when you make this corporate tax election, and pay them only on salaries. ✍️
Tax Loophole #3: Shelter income in retirement accounts 👵
Tax shelters are legal ways to reduce your taxable income and tax liabilities. Tax shelter groups include retirement accounts and investment accounts—so if you haven’t had motivation to save for retirement, this small business tax loophole could provide it. 🏝
A traditional 401k or Individual Retirement Account (IRA) has funds that aren’t taxable until the owner of the account retires. That means money that would have normally been taxed by the IRS will instead accrue earnings and interest until the funds are drawn.
Additionally, a Roth IRA or Roth 401k is a good option for individuals expecting a higher income. The money that goes into these accounts is taxed at the time of contribution, but not when the funds are withdrawn. 💵
Tax Loophole #4: Claiming the QBI deduction 💵
The Qualified Business Income (QBI) deduction is a complex deduction that allows several 20% deductions on QBI, real estate investment trust (REIT) dividends, and publicly traded partnership (PTP) income.
Your QBI is made up of qualified items of income, gain, deduction, and loss from business or trade, and is inclusive of S-corps, partnerships, and sole proprietorships. For more information on the QBI deduction, read the relevant IRS article on QBI deductions or speak to a tax professional.
Live: How to Grow Your Business Without Chasing More Clients
Tuesday, November 26 | Ft. Certified Profit First Professional Debbie Deknight
Save Your SpotTax Loophole #5: Business vehicle deductions 🚗
Your car’s costs can be deducted from your taxes if you use it for business purposes, even if it’s also partially used for personal purposes! These costs include gas, oil, repairs, tires, insurance, fees, licenses, and depreciation.
However, it’s important to note that proper bookkeeping is incredibly important for this kind of deduction. The law requires that you substantiate your expenses with adequate records to qualify—that means keeping your receipts organized.
Luckily, Relay has your back! With Relay’s new receipt management feature, you can keep track of all your expenses in one place. We’ll send you automatic reminders to upload your receipts after you pay for something with a Relay debit card (like gas) and automatically link your receipts to the matching transaction.
Normally, you have to account for depreciation when deducting your business vehicle. But, thanks to viral posts on TikTok and other social media platforms, the “G-Wagon Tax Write-off” has come to light. Also known as the Section 179 Tax Write-Off, this idea allows you to deduct the full business purchase price of qualifying assets in the year that they were purchased, rather than depreciating them over time. 🚐
Tax Loophole #6: Business meal deductions 🍽
If you’re paying for business meals without using the deductions, it’s time to get some money back! If you as the business owner or an employee of the business are present during the food and drinks being provided, and the meals are from legitimate restaurants, they are 50% deductible*. 🍴
Make sure that your expenses are 100% related to your business. This includes dinners at hotels during conferences, fancy restaurants during overnight business travel, and year-end parties for employees. 🎉
*For a brief period, business meals were 100% deductible. In 2024, they are now back to where they were pre-2021 at 50% deductible.
Tax Loophole #7: Deduct medical expenses via a medical reimbursement plan 🩺
Medical reimbursement plans, or MERPs, are employer-sponsored benefit plans that help to cover employee medical expenses. Not only are MERPs customizable for the employer, but they also provide tax benefits to both employees and employers. 🩹
Employees can contribute to MERPs tax-free, and MERP payments made by employers are deductible. This means that in addition to providing for your employees’ health, you’re also getting a tax break. 💉
It’s important to note that MERPs are only viable for C-corporations (C-corps). If your LLC is taxed as a C-corps, you’ll also qualify. To become a C-corp, you must pay some fees, file articles of incorporation, offer stock to shareholders, obtain an employer identification number (EIN), and establish a board of directors. This isn’t the right tax strategy for every business, but it’s worth investigating if you think it might make sense for your company.
Tax Loophole #8: Hire family members to save on payroll taxes 👨👩👦
Some small business owners have considered hiring family members to save on payroll taxes. However, this tax loophole only works if you’re hiring children. The goal isn’t necessarily to save on payroll taxes, but rather to create earned income to contribute to a retirement account or IRA. 👧
If the family member you’re hiring is, in fact, a minor (under 18), their wages are exempt from payroll taxes, but not likely from State Unemployment Insurance.
Bonus tip: Take advantage of small business tax credits 🪄
Tax credits are another way to save money during tax season. They differ from tax deductions; instead of lowering your taxable income, they are directly subtracted from the amount of money that taxpayers owe. 🤑
There are dozens of business tax credits available, so talk to your tax professional or accountant to determine which ones you may qualify for when tax season comes.
Live: How to Grow Your Business Without Chasing More Clients
Tuesday, November 26 | Ft. Certified Profit First Professional Debbie Deknight
Save Your SpotThe bottom line on small business tax loopholes 📝
The best tip we have for small business owners who want utilize tax loopholes? Talk to a professional!
CPAs and other money pros know how to help you leverage these small business tax loopholes. While this article covered many of the most-used ways to get tax benefits, every business is different—to make sure you take advantage of every tax savings opportunity available, it’s always wise to discuss your unique situation with an expert.
Stay on the money with Relay
If you’re looking for other ways to save money as a small business, have you considered Relay?
Relay’s online banking platform is designed for small business owners. You can open 20 individual checking accounts, 2 savings accounts, and issue 50 virtual or physical debit cards. You’ll love the flexibility and freedom that come with our features designed for entrepreneurs like you. 💚
