5 ways small business owners can reduce taxes in 2025

If you wait until tax season to think about taxes, you are already behind. The number one mistake Ramp sees small business owners make when it comes to taxes is failing to plan.

Most small business owners treat taxes as a once-a-year obligation. They meet with their accountant in March or April, hand over a stack of documents, and hope for the best. By that point, most opportunities to reduce taxes are long gone.

Tax savings happen before the year ends, not when filing a return. Some of the most successful business owners know that tax planning is a year-round process, not a one-time event.

The good news? You can still find a qualified accountant and make changes now that will reduce your tax bill in 2025.

How to reduce business taxes

Here are five strategies to help you keep more of your hard-earned money.

1. Choose the right entity structure

Always plan from the foundation up. Your business structure determines how much tax you pay, and the wrong choice could be costing you thousands of dollars per year.

The key is to align your entity structure with both your current income and long-term business goals.  You also must weigh legal considerations and operational considerations with tax savings.

‍A sole proprietorship or single-member LLC may seem like the easiest setup, but it often results in higher taxes for small business owners. All profits are subject to self-employment tax, which is 15.3% on top of your regular income tax.

If your business generates more than $80,000 in net profit annually, electing to become an S-corporation could result in significant tax savings.  While there is not an exact magic profit number, this is often where we see business owners have tax savings that outweigh additional compliance and administrative costs.

With an S-corp, you can take a reasonable salary and pay yourself the rest as distributions, which are not subject to self-employment tax. This can significantly lower your tax liability.

For some large businesses and heavy reinvestment needs, a C-corporation may be worth considering. C-corps are taxed at a flat 21% corporate rate, which could be lower than your personal tax rate, depending on your income level. However, this structure requires careful planning to avoid double taxation on dividends.  Lastly, C-corporations are also a long-term tax planning maneuver for those looking to scale quickly and exit.  If you plan properly, you may be able to obtain the lucrative QSBS exclusion. 

Key takeaway: If you have not reviewed your business entity in the past two years, it is time for a checkup. Your tax savings could be hiding in your structure.

2. Maximize tax deductions and optimize IRC 199A

Every dollar you deduct is a dollar that is not taxed. However, most small business owners underutilize deductions or fail to document them properly, which leads to missed opportunities.‍

Common deductible expenses include:

• Business-related travel and lodging
• Home office expenses (a portion of rent, utilities, and internet if you work from home). Depending on your entity structure, the method of deduction here varies.
• Marketing and advertising costs
• Professional services like legal and accounting fees
• Equipment and software purchases
• Employee wages and benefits
• Banking fees and transaction fees
• Interest
• Depreciation on asset purchases (especially beneficial for large asset purchases by using Section 179 or 168k)

Beyond normal business deductions, IRC Section 199A, also known as the Qualified Business Income (QBI) deduction, is one of the most powerful tools available. This provision allows eligible small business owners to deduct up to 20% of their qualified business income.

‍However, the rules are complex. Your eligibility depends on your total income, the nature of your business, and whether you pay W-2 wages. Service-based businesses, such as law firms, medical practices, and consultants, face additional restrictions when their income exceeds a certain threshold (known as SSTBs).

Maximizing this deduction may require:

• Adjusting how you pay yourself. In some cases, it can make sense to take a higher wage as an S-corp business owner to optimize your 199A deduction.
• Hiring W-2 employees instead of using contractors—the formula can look at total wages paid. If you have no wages and all contractors, you may completely miss out.
• Restructuring income or expenses before year-end

If you are not proactively planning around 199A, you could be leaving a five- or six-figure deduction on the table.  The higher your income, the more sophisticated and important the planning becomes in this area.

3. Find and utilize niche tax credits

Most business owners are familiar with business tax deductions, but tax credits provide even more powerful savings. Unlike deductions, which lower taxable income, tax credits reduce your tax bill dollar for dollar.  Tax credits exist at the federal and state levels and are often used by the government to incentivize certain types of investment or business behavior.

The problem? Many small businesses do not take the time to identify which credits they qualify for. Here are some that may apply to you:

• Research & Development (R&D) Tax Credit—Available to businesses developing new products, software, or processes. Even small improvements to existing processes may qualify.  The R&D tax credit is often misunderstood and can even offset payroll taxes if you are not profitable yet.  However, there are complications after TCJA of 2017, so it is best to work with a specialist on this tax credit.
• Work Opportunity Tax Credit (WOTC)—Provides tax savings for hiring employees from targeted groups, such as veterans or long-term unemployed individuals.  Business owners can garner lucrative tax credits by employing these individuals, but the deadlines and paperwork required to claim these credits can be complex. Normally, your payroll company would be available to assist with this credit.
• Energy Efficiency Tax Credits—If your business invests in energy-saving equipment or makes eco-friendly building upgrades, you could qualify for federal tax incentives via the Investment Tax Credit.  
• 45E Tax Credits—The government will give you tax credits for starting retirement plans and even giving your employees matches. In practice, we see nearly every business miss these tax credits as they are relatively new and not well publicized.

State tax credits can also save you thousands of dollars in addition to federal tax credits, so it is best to work with your tax strategists and CPAs to identify these credits.

4. Optimize retirement planning

Retirement accounts are often overlooked in tax planning, but they are one of the most effective ways to reduce taxable income while building wealth.‍

As a small business owner, you have access to better retirement savings options than traditional employees. Most business owners do not realize how much they can save for retirement, either pre tax or post tax (ROTH) and leave short and long term tax savings on the table.

The right plan depends on your income level, business structure, and whether you have employees.

Here are some of the best tax-advantaged retirement plans:

• Solo 401(k)—Ideal for self-employed individuals with no employees. Contribution limits can reach $69,000 in 2025, significantly reducing taxable income.
• SEP IRA—Allows contributions up to 25% of compensation or $69,000, whichever is lower. Great for high-earning self-employed individuals.
• SIMPLE IRA—A solid option for businesses with employees, offering tax-deferred growth with lower administrative costs.
• Defined Benefit Plans—Best for high-income business owners looking to contribute six figures per year while maximizing tax savings.  In fact, some high-earnings business owners use these accounts to deduct $200 to $300k per year.

As you hire W2 employees, more complexity comes into play and most business owners end up with a Safe Harbor 401k plan or a Simple IRA.  

5. Work proactively with a tax strategist year-round

The biggest tax savings come from proactive planning, not last-minute filings. If you only talk to your CPA once a year, you are missing major opportunities. Q1 and Q2 are ideal times to be actively planning to reduce your current year's tax and not worry about the previous year's taxes.

In order to properly plan throughout the year, you need the following as a baseline:

• Accurate accounting and bookkeeping. Without this, there is nothing to plan off of.
• Projections or forecasts for your next 12 months
• Ability to forecast states where your business will be operating to ensure all state tax credits can be researched.
• Detailed thoughts about your business and personal financial goals.
• Year-round conversations with your tax and accounting teams. Ask them if they offer tax strategy vs. tax preparation.

Taking the next steps to reduce your taxes

If you are serious about reducing taxes in 2025, you need a strategy that goes beyond basic deductions.‍

Choosing the right business structure, maximizing deductions, improving accounting processes, leveraging tax credits, optimizing retirement plans, and working with a tax strategist can lead to significant savings.  If you take these tax savings and invest them at 7%, your money doubles after a decade. Why continue overpaying your taxes vs building your financial future?

The worst thing you can do is wait until tax season to figure it all out. The best time to start planning is now.