6 Year-End Small Business Tax Saving Tips
There’s still time for small businesses and their owners to implement strategies to save taxes for 2025. Traditional strategies continue to be valuable, but the One Big Beautiful Bill Act (OBBBA) includes several changes that also can help lower 2025 federal income tax obligations for small businesses and their owners. Consider these six year-end tax planning tips.
- Manage Pass-Through Entity Income
The federal income tax rates for individuals are relevant if you operate your business as a sole proprietorship or one of the following types of pass-through entities:
- A single-member limited liability company (LLC) treated as a sole proprietorship for tax purposes,
- A partnership,
- An LLC treated as a partnership for tax purposes, or
- An S corporation.
Taxable income generated by these entities passes through to the owners and is taxed on their personal returns. (See “2025 Individual Federal Income Tax Rate Brackets” below.)
If you expect to be in the same or lower federal income tax bracket in 2026, the traditional strategy of deferring taxable income into next year while accelerating deductible expenditures into this year makes sense. This strategy will, at minimum, postpone part of your tax liability from 2025 until 2026 by reducing the amount of income that’s reported on this year’s personal return. If you’re in a lower bracket next year, it may provide some permanent tax savings.
On the income side, the general rule for cash-basis businesses is that you don’t have to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this rule, consider waiting until near year end to send out some invoices to customers. Of course, this should be done only for customers with solid payment histories. Other ways for cash-basis businesses to reduce taxable income for the current year include:
Charging recurring expenses on a credit card at year end. You can claim 2025 deductions even though you won’t pay the credit card bills until 2026.
Paying expenses with checks and mailing them a few days before year end. The tax rules allow you to deduct the expenses in the year you mail the checks, even though they won’t be cashed or deposited until early next year.
Prepaying some expenses before year end. Prepaid expenses can be deducted in the year they’re paid if the economic benefit from the prepayment doesn’t extend beyond the earlier of 1) 12 months after the first date on which your business realizes the benefit of the expenditure, or 2) the end of the next tax year.
Important: Timing strategies that reduce business income may also reduce your qualified business income (QBI) deduction (see below) and certain other tax breaks that depend on taxable income. Your tax advisor can help determine what’s right for your situation.
On the other hand, if you expect to be in a higher tax bracket next year, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2026. That way, more income will be taxed at this year’s lower rate instead of at next year’s higher rate.
- Maximize the QBI Deduction
The OBBBA makes permanent the individual deduction based on QBI from pass-through business entities. The write-off can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher taxable income levels. You can also claim the QBI deduction for up to 20% of qualified dividends from real estate investment trusts (REITs) and qualified income from publicly traded partnerships.
To make the most of this deduction, manage your taxable income to minimize or avoid restrictions on the QBI deduction. Strategies to consider include harvesting capital losses and postponing Roth IRA conversions.
Important: Other tax planning decisions can adversely impact your allowable QBI deduction. For example, you might inadvertently reduce your allowable QBI deduction if you claim significant first-year depreciation deductions or make sizable deductible retirement plan contributions. Work with your advisor to optimize your overall tax results.
- Buy Fixed Assets
If you’ve been planning to buy new or used machinery, equipment or computer systems, you may be able to write off most or all of the asset’s purchase price on your 2025 return if the asset is placed in service before December 31, 2025. The OBBBA restores 100% first-year bonus depreciation for eligible assets that are acquired and placed in service after January 19, 2025. Before the new law, the first-year bonus depreciation rate for assets placed in service this year was only 40%.
Eligible assets include most new and used tangible property with a recovery period of 20 years or less, such as:
- Office furniture and equipment,
- Computer hardware and peripherals,
- Commercially available software, and
- Certain vehicles.
Heavy SUVs, pickups and vans used over 50% for business are treated for federal income tax purposes as transportation equipment. The business percentage of their cost can qualify for 100% first-year bonus depreciation. To qualify, the vehicle must have a manufacturer’s gross vehicle weight rating (GVWR) over 6,000 pounds.
You can also claim first-year bonus depreciation for real estate qualified improvement property (QIP). This is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP and usually must be depreciated over 39 years.
Most tangible depreciable business assets (including off-the-shelf software and QIP) also qualify for a separate first-year tax break: the Section 179 deduction. Sec. 179 expensing is also allowed for:
- Roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property, and
- Depreciable personal property used predominantly in connection with furnishing lodging.
For qualifying property placed in service in 2025, the OBBBA increases the Sec. 179 expensing limit to $2.5 million (up from $1.25 million for 2025 before the new law). A phaseout rule reduces the maximum Sec. 179 deduction when qualifying asset purchases exceed $4 million (up from $3.13 million for 2025 before the new law).
There’s also a special limitation on Sec. 179 deductions for heavy SUVs used over 50% for business. The limitation applies to vehicles with GVWRs between 6,001 and 14,000 pounds. For tax years beginning in 2025, the maximum Sec. 179 deduction for a heavy SUV is $31,300.
Important: Sec. 179 deductions are subject to several limitations that don’t apply to first-year bonus depreciation, especially for S corporations, partnerships and LLCs treated as partnerships for tax purposes. The conventional wisdom is to claim allowable 100% first-year bonus depreciation deductions, rather than claiming Sec. 179 deductions for the same assets.
- Place Your New Factory in Service
The OBBBA allows businesses to claim additional 100% first-year depreciation for qualified production property (QPP). This refers to nonresidential real estate, such as a factory building, that’s used as an integral part of a qualified production activity, such as the manufacturing, production or refining of tangible personal property. Before the OBBBA, these buildings generally had to be depreciated over 39 years.
QPP doesn’t include any part of nonresidential real property that’s used for:
- Offices,
- Administrative services,
- Lodging,
- Parking,
- Sales activities,
- Research activities,
- Software development,
- Engineering activities, or
- Other functions unrelated to the manufacturing, production or refining of tangible personal property.
To qualify for this new break, construction of QPP must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service in the United States or a U.S. possession, generally before 2031.
So, if you began constructing an eligible building after January 19, 2025, and are nearing completion, you may want to do what you can to get it completed and placed in service by December 31, 2025. That would make you eligible to claim QPP 100% first-year depreciation on your 2025 return.
- Establish a Tax-Favored Retirement Plan
If your business doesn’t already have a tax-favored retirement plan, consider setting one up. Current retirement plan rules allow for significant annual deductible contributions.
For example, if you’re self-employed and establish a Simplified Employee Pension (SEP) IRA, you can contribute up to 20% of your net self-employment income. If you’re employed by your own corporation, you can contribute up to 25% of your salary. In both situations, the maximum contribution limit for 2025 is $70,000. Making the maximum contribution for this year would save someone in the 32% federal income tax bracket $22,400 (32% x $70,000).
Other small business retirement plan options include:
- 401(k) plans,
- Solo 401(k)s that benefit just one person,
- Defined benefit pension plans, and
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
You can adopt and fund a tax-favored qualified employee retirement plan, except for a SIMPLE-IRA plan, as late as the due date (including any extension) of the sponsor’s federal income tax return for the adoption year. The plan can then receive deductible contributions that are made by the return due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.
To illustrate, suppose Tim operates a calendar-year sole proprietorship and files an extension for his 2025 federal income tax return. The due date for his Form 1040 is October 15, 2026. If Tim sets up a SEP-IRA and makes his initial contribution by October 15, 2026, he can deduct the contribution on his 2025 return.
Important: To make a SIMPLE-IRA contribution for the 2025 tax year, you must have set up the plan by October 1, 2025.
Contact your tax advisor for more information on small business retirement plan alternatives. Also, be aware that if your business has employees, you may have to make plan contributions for them, too.
- Invest in R&E Activities
Before the OBBBA, research and experimental (R&E) expenditures were generally amortized over five years if incurred in the United States (15 years if incurred outside the country). For tax years beginning in 2025 and beyond, the new law allows businesses to immediately deduct eligible domestic research and experimental (R&E) expenditures. R&E activities conducted outside the United States must still be amortized over a 15-year period.
Important: The R&E deduction must be reduced by any credit for increasing research activities claimed for those expenditures.
Taxpayers with R&E expenditures for taxable years beginning in 2022 through 2024 can elect to write off the remaining unamortized amount of those expenditures over a one-year or two-year period. That period starts with the first taxable year beginning in 2025. In addition, eligible small business taxpayers (for 2025, those with average annual gross receipts of $31 million or less for the past three years) can generally elect to apply the new immediate deduction rule retroactively to taxable years beginning after 2021.
Consult your tax advisor for more information about these elections, as well about how larger R&E deductions on your 2025 return could impact your overall year-end planning strategies.
Ready, Set, Plan
If you act soon, you can still take steps to reduce 2025 taxes. The OBBBA makes year-end planning a little easier by providing some tax planning certainty for businesses and their owners, probably through 2028, and enhancing some business tax breaks. Contact your tax advisor to learn more about these strategies and other tax-smart, last-minute moves that make sense for your situation.
| 2025 Individual Federal Income Tax Rate Brackets
The One Big Beautiful Bill Act permanently extends the individual federal income tax rates established by the Tax Cuts and Jobs Act. The rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The thresholds for these rates are adjusted annually for inflation. For 2025, the rate brackets are as follows: 2025 Federal Tax Rates on Ordinary Income and Short-Term Capital Gains
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