Six strategies to optimize your business tax planning this year

Many small business owners are seeking the right tax strategies to reduce liabilities and improve cash flow. At Elliott Davis, we know that taking advantage of available tax incentives can make a significant difference on your bottom line. That is why we have outlined six smart tax strategies that can help companies manage the complexities of tax planning and work toward long-term financial stability.

Strike the Right Balance Between Salary and Distributions (S Corporations)

If you are an owner in an S corporation, it can be tricky to strike the right balance between salary and distributions when structuring your compensation. Determining a reasonable salary is important, and the IRS watches out for businesses that avoid paying proper wages to owners and instead take most of their income as distributions. On the flip side, paying yourself an excessive salary can also have costly consequences, as doing so will drive up your payroll tax liability.

Paying yourself a reasonable salary keeps you compliant with IRS rules and allows your S corporation to deduct that salary as a business expense. This deduction reduces the company’s taxable income and can provide significant Social Security and Medicare tax savings.

There is no strict rule on what’s “reasonable,” but common guidelines include:

• Paying yourself based on industry averages.
• Using a salary-to-distribution ratio (some follow the 60/40 rule).
• Keeping good records to support your salary choice.

A trusted tax advisor can help you determine a reasonable salary to pay yourself and other owners of the business. Be sure to evaluate these compensation decisions regularly.

Also, if you own more than 2% of the company, consider paying your health insurance premiums through the business. The S corporation can deduct the cost, and you can claim it on your personal taxes.

Avoid Overpaying Yourself (C Corporations)

C corporations have the opposite problem—paying owners too much in salary can increase your tax liabilities. If the IRS thinks your salary is excessive, they may call it a “disguised dividend,” which means the corporation cannot deduct it as a business expense.

However, when set at a reasonable level, your salary is deductible on the corporate return, reducing the company’s taxable income and, in turn, lowering its tax burden. This can help mitigate the effects of double taxation, where corporate profits are taxed at the entity level and again when distributed as dividends to shareholders. Balancing salary and dividends strategically can optimize tax efficiency for both the corporation and the owner.

To avoid being flagged for a disguised dividend:

• Set your salary at a level comparable to what others earn in similar roles.
• Maintain clear records to support that your compensation is reasonable.
• Balance salary and dividends to increase deductible wages.

Your tax advisor can help make sure your pay structure follows the rules and reduces the impact of double taxation.

Use Retirement Plans to Lower Taxes

Saving for your future retirement reduces your taxes today. Business owners can contribute to retirement accounts like:

• 401(k) plans (with extra “catch-up” contributions if you are 50+) $23,500 for 2025 and $7,500 catch up contribution if over Age 50
• Layer on a profit-sharing plan and the combined employee and employer contribution for 2025 is $70,000.

Simplified employee pension (SEP) individual retirement accounts (IRAs) are great for self-employed people or small businesses). The total contribution limit for SEP IRAs is 25% of compensation, with a maximum of $70,000.

These contributions lower your taxable income, which can be a big tax break, especially for high earners. If you have employees, you may need to contribute for them too, so talk to your tax advisor.

Boost Tax Benefits Through Charitable Giving

Donating to charity can also be a great tax strategy. In a pass-through entity, such as a partnership or S corporation, charitable contributions flow through to the partners’ tax returns, potentially reducing their tax burden. For C corporations, the tax benefits of charitable giving are realized at the entity level and are limited to 25% of taxable income.

One strategic approach is using a Donor-Advised Fund (DAF), which allows your business to contribute now, secure the tax benefit, and decide later which charities to support at a later date. Structuring donations wisely helps you achieve the optimal tax benefit while supporting causes that align with your business values.

For more information on optimizing your giving strategy, check out our article Make the Most of Your Charitable Contributions in 2025.

Take Advantage of Bonus Depreciation

If your business buys equipment, furniture, or other fixed assets, you may qualify for bonus depreciation—a tax break that lets you deduct more of the cost upfront.

The Tax Cuts and Jobs Act (TCJA) allowed 100% bonus depreciation through 2022, but in 2025, the rate will be 40%. To benefit, consider:

• Buying or placing assets in service before year-end.
• Keeping detailed records to support deductions.

For more information on planning around the TCJA tax cuts, refer to our article Adapting Your Tax Strategy Amid TCJA’s Uncertain Future.

Keep Track of Your Investment in a Business

If you are a partner in a business, your ability to deduct losses depends on how much you have invested. The IRS has rules that limit deductions to your basis (your investment in the business) and prevent deductions beyond what you are “at risk” for.

If you take out more money than you have invested, there may be tax consequences. To stay on top of this, keep detailed records of contributions, income, and withdrawals.

We Can Help

Tax laws are complicated, and making the right moves can save your business a lot of money. At Elliott Davis, our team of seasoned tax advisors can help you take full advantage of these strategies while staying compliant with the IRS. Contact a member of our team today to schedule a consultation.

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