Tax Loopholes for Small Businesses: What to Know

As a small business owner, you must try to reduce your tax liability. Many entrepreneurs achieve this goal by embracing a year-round tax strategy and taking every eligible tax deduction and credit available. Some will also embrace tax loopholes, which more businesses should consider as their operations build.

If your small business has yet to embrace tax loopholes, you're not alone. Use this great blog to learn what to know about tax loopholes for your small business, how you may benefit, and other strategies to reduce what you pay to government authorities. 

What Are Tax Loopholes for Small Businesses?

Thousands of pages of tax laws and regulations have been written that businesses and individual taxpayers must abide by. Typically, when aspects of tax law are ambiguous or make an omission that leads to the unintended benefit of reducing a business's tax liability or reduces it much more than the authors intended, that is considered a tax loophole.

While tax loopholes are unintended, they are another legal route to minimizing tax liability, which can significantly reduce expenses and increase profitability. The qualified business income (QBI) deduction introduced in the 2017 Tax Cuts and Jobs Act (TCJA) is an example of a less traditional tax loophole.

The QBI deduction allows small business owners who operate as pass-through entity business structures, including a sole proprietorship, partnership, limited liability company (LLC), or S corp, to deduct up to 20% of net business income, which reduces their tax burden. This deduction is written into the act, which defies the usual standard to qualify as a tax loophole. However, some still view QBI as a loophole due to the way it can be applied, which some argue makes it a tax loophole.

It's important to understand common tax breaks and deductions that may apply to your business, especially those often overlooked, including expenses related to family hiring strategies and applicable industry-specific deductions.  

Unpacking Common and Overlooked Tax Deductions for Small Businesses

While loopholes are less common and can be closed, there are common tax deductions you should be aware of to reduce your business tax liability. Some deductions, such as standard deductions, have been updated for the 2025 tax year due to inflationary considerations. View all IRS tax inflation adjustments for tax year 2025 here. Updates to standard deductions include the following: 

• The standard deduction increased by $400 to $15,000 for single taxpayers and married individuals filing separately.

• The standard deduction increased by $800 to $30,000 for married couples filing jointly.

• The standard deduction increased by $600 to $22,500 for heads of households.

While standard deductions are well known, there are lesser-known tax deductions that might be appropriate for your operations, which we cover below. Generally, the political climate will impact the availability of certain deductions, with all the deductions we detail currently available to eligible businesses.  

Let's Talk Business Expenses

Small business owners and entrepreneurs can write off expenses related to their work, which legal shifts in the country can impact. To qualify, your business expenses must be ordinary (common and acceptable expenses for your industry) and necessary (appropriate and helpful expenses for your line of work). Examples of business expenses you should consider include:

• Supplies. You can deduct the cost of office supplies. Keep track of your receipts for purchases such as writing utensils, paper, notepads, and staplers.

• Utilities. The utilities you pay for, such as office electricity, water, and heat, can be claimed as business tax deductions.  

• Rent. In addition to utilities, the rent you pay to occupy your offices can be written off.

If managing expenses has been challenging, consider 1-800Accountant's full-service tax preparation solution. This solution ensures maximum tax savings and accurate, timely filings. 

Making Sense of the Home Office Deduction

You can deduct certain costs of maintaining a home office. To qualify, you must dedicate part of your home or apartment exclusively for business use, and you cannot have a primary workplace elsewhere.

You can determine your home office deduction using either the simplified or the regular method:

• Simplified method. To use the simplified method, multiply your home office square footage by $5. The maximum simplified home office deduction is $1,500 (300 square feet).

• Regular method. To use the regular method, determine your total home-related expenses. Include costs such as rent, mortgage interest, maintenance, and utilities. Allocate a portion of the costs to your home office based on the percentage of the area dedicated to your workspace. 

Whichever method you choose, you will then calculate and report your home office deduction using IRS Form 8829, Expenses for Business Use of Your Home.

Navigating Vehicle Expenses

If you use a car or truck for work, you can take advantage of vehicle-related deductions using either the standard mileage rate or the actual expense method. 

• Standard mileage rate. The 2025 standard mileage rate is 70 cents per mile. You can claim a deduction per mile driven for business purposes.

• Actual expense method. You can also deduct actual car expenses. Eligible deductions include vehicle insurance, repairs, maintenance, and fuel.

Regardless of your chosen method, you can deduct tolls, parking fees, and depreciation. However, filers using the standard mileage deduction must follow restrictions on depreciation expense deductions.

Understanding Health Insurance Premiums

If you lack employer-sponsored healthcare coverage, you can establish a health insurance plan for your business, positively impacting your net income. Use IRS Form 7206, Self-Employed Health Insurance Deduction, to determine your tax write-off.

• Self-employed individuals can deduct health insurance premiums paid for eligible plans. 

• This deduction includes medical, dental, and vision insurance payments and qualified long-term care coverage costs.

The IRS announced changes to medical savings accounts that may impact your operations.  If you have self-only coverage, the plan must have an annual deductible between $2,850 (a $50 increase from 2024) and $4,300 (an increase of $150). The maximum out-of-pocket expense amount is $5,700, a $200 increase from the previous tax year.

Getting a Handle on Startup Costs

Most, if not all, of your start-up costs will be eligible for deduction as business expenses. This includes the cost of setting up your business entity and filing with state and federal authorities. Any expenses associated with starting the business before it is in operation are included here. This includes equipment, hiring costs, and even the software you buy to use in your accounting system. However, there is a cap.

You can deduct up to $5,000 in startup costs and up to $5,000 in organizational costs, although further rules apply if your costs exceed $50,000. In this scenario, these deductions are reduced by the amount your startup or organizational costs exceed the $50,000 threshold.

Exploring Advanced Tax Strategies for Small Businesses

Review the advanced tax strategies your small business can leverage to minimize tax liability while optimizing your business's financial health. Tax rules and laws often change, requiring strategies and processes that you can view below. 

Taking Advantage of the Section 179 Deduction

Section 179 is a tax depreciation deduction for business equipment purchases. Section 179 allows you to take an immediate tax deduction for property placed in service during the year instead of deducting the cost over several years, as you would via more traditional depreciation methods. While C corporations, partnerships, S corporations, and sole proprietorships can claim this deduction, trusts and estates are ineligible.

The Section 179 deduction applies to business property, including:

• Buildings

• Machinery and equipment

• Furniture

• Vehicles

• Computer software

Items such as land and custom computer software cannot be claimed.  For 2025, the maximum deduction is $1,250,000, and the phaseout threshold is $3,130,000.  

Making Sense of Bonus Depreciation

Bonus depreciation follows separate, complex rules compared to Section 179 but are related. Generally, you may deduct 40% of the cost of eligible property. 

To take advantage of bonus depreciation, your business should deduct Section 179 depreciation first. After calculating your Section 179 tax deduction, determine whether your remaining property is eligible for bonus depreciation. Your bonus depreciation deduction represents 40% of the remaining property cost.

Like the TCJA, the ability to claim bonus depreciation is currently phasing out, although the current administration has signaled that both may be reinstated. 

Getting Smart with Retirement Contributions

Opening a tax-advantaged retirement account to support smart retirement contributions is essential. These accounts are designed to provide tax benefits when you contribute money to them, including solo 401(k) and simplified employee pension (SEP) plans. 

• Solo 401(k) Plan. If you’re a startup with no employees other than your spouse, you can open a solo 401(k) plan (also called a solo-k, uni-k, and one-participant k). In solo 401(k)s, you and your business contribute to your retirement plan. As an individual, you can contribute up to 100% of your self-employment earnings or up to a maximum contribution of $23,500 in 2025. The business can also contribute up to 25% of your self-employment earnings. Combined contributions cannot exceed $70,000.

• SEP Plan. SEP plans are for businesses of any size and are fully funded by the employer. Employers can contribute up to 25% of eligible employee compensation, up to a maximum contribution of $70,000 in 2025. These plans are useful if you need flexibility because contributions are discretionary. If your business significantly increases revenue for a particular tax year, you can contribute more. In years where revenue is down, you can decrease or even halt contributions for that specific year. SEP plans are optimal for sole proprietors with only a few employees since employer contributions must be equal for all employees.

Whichever route you choose, ensure it's part of a larger, year-round tax planning strategy. 

Unlocking the Research and Development (R&D) Tax Credit

To spur innovation, the American government offers this credit representing a dollar-for-dollar reduction of your business's tax liability for certain R&D-related expenditures. Expenses that typically qualify include: 

• Design and development of new products

• Refinement of existing products

• New processes

• Innovative techniques 

• State-of-the-art software

Generally, you could qualify for this federal tax credit if your business invests in R&D for a product, process, or technique. The Protecting Americans from Tax Hikes (PATH) Act passed in 2015 has aided medium and small businesses in pursuing this credit. While there's no formal process for measuring your business's eligibility, there is a specific process for claiming this credit using IRS Form 6765.

If you're having trouble identifying qualifying expenses or have questions, talk to the experts at 1-800Accountant to ensure you can take advantage of the R&D tax credit. 

Embracing Technology-Driven Tax Solutions for Small Businesses

As America's leading virtual accounting firm, we understand the benefits of embracing tax technology. Our affordable, tax-deductible services are powered by a mix of expert CPAs and technology, enabling the businesses we serve to minimize tasks while maximizing tax savings.

If you handle your business taxes, embracing technology will help make the process more efficient. 

The Role of Automation in Tax Filing

Automation and other modern technology, such as artificial intelligence (AI) and machine learning, can streamline many tax-related processes, including tax preparation and filing. Embracing these technologies can reduce your administrative burden while increasing the accuracy of your work.

Ensuring your bookkeeping and tax filing work is error-free won't protect you from an audit notice, which can be triggered for many reasons, but it will make the audit process more efficient and less stressful as you run your business.

While this technology can be helpful, remember to always turn to a tax professional to handle your work or check its accuracy before submitting your tax return to the IRS. 

Using Digital Tools for Financial Management

Digital tools, such as bookkeeping and accounting software, make managing finances, tracking expenses, and preparing for tax season easier than ever before. These tools can seamlessly integrate with 1-800Accountant's tax advisory service to enhance financial management and tax efficiency. 

Software such as Freshbooks and Quickbooks Online aid in financial management with numerous features, including recurring transactions and reporting automation, to help ensure the accuracy of your records while improving compliance. You should still play an active role in ensuring your financial data is accurate, but do-it-yourself software has made financial management more manageable for busy small business owners. 

1-800Accountant makes it easy for business owners who manage their finances themselves to transition to our full-service bookkeeping solution. Our proprietary bookkeeping platform, ClientBooks, is compatible with leading bookkeeping software, including QuickBooks Online, FreshBooks, and Wave. Our bookkeepers are fluent in these platforms, ensuring seamless integration and financial data management.

Discovering Industry-Specific Tax Strategies for Small Businesses

Region- and industry-specific tax strategies ensure that your small business's unique tax considerations are supported by tailored advice that can optimize annual tax savings. 

Tailoring Tax Advice for Different Sectors

The tax advice for e-commerce businesses will differ from that for real estate professionals and other sectors. Take deductions for e-commerce and real estate businesses. Some deductions, such as marketing, advertising, and self-employment write-offs, apply to both professions, while others can be industry-specific.

For example, real estate professionals who are National Association of REALTORS (NAR) members can write off their tax-deductible NAR fees. 

Making the Most of State-Specific Tax Benefits

While many tax benefits are available to businesses at the federal level, it is important to understand applicable state and local tax benefits.

For example, real estate professionals can reduce their taxable income via the state and local taxes (SALT) deduction. These deductions are capped at $10,000 or $5,000 if you're married and filing your income taxes separately. The IRS has clearly defined deduction categories:

• State, local, and foreign income taxes or state and local general sales taxes instead of state and local income taxes

• State and local real property taxes

• State and local personal property taxes

The SALT deduction received its current limits as part of the TCJA. The current limits expire after 2025.

Navigating Legal and Compliance Considerations for Tax Deductions

Your small business must maintain compliance to claim eligible tax deductions while avoiding penalties and increased IRS scrutiny. Business-related expenses, such as business insurance, business meals during business travel or a business trip, travel expenses, education expenses, and home office expenses, are usually deductible business expenses. Half of the 15.3% self-employment tax you pay can also be deducted, reducing your small business tax bill.

The Importance of Record Keeping and Documentation

Good recordkeeping will support the tax deductions you intend to claim for your business. We recommend saving receipts, statements, and supporting documentation to ensure a streamlined tax preparation and filing process. 

While the IRS is increasingly scrutinizing this documentation, they also offer tips to support the important function of good recordkeeping.  IRS has indicated that good recordkeeping helps you: 

• Monitor the progress of your business

• Prepare your financial statements

• Identify sources of your income

• Keep track of your deductible expenses

• Keep track of your basis in property

• Prepare your tax returns

• Support items reported on your tax returns

If you've received an IRS notice, don't get too upset. 1-800Accountant's comprehensive audit defense solution provides peace of mind and ensures compliance with IRS regulations during a difficult time.

Partnering with a Tax Professional

While many small business owners will handle their financial work in the beginning to save budget, they will eventually need the services of a tax professional. The tax professional you select should help you navigate complex tax laws impacting your industry and region, maximize deductions, and provide support year-round.

When you trust 1-800Accountant with your complex financial work, we match you with a tax professional or team familiar with your region and industry. This is a distinct break with local accountants and other generalists who lack the specialized knowledge to ensure compliance while maximizing deductions, credits, and your annual tax liability. We also break from the traditional accounting hourly fee model by providing a suite of affordable, flat-rate, and tax-deductible services. 

Our CPAs have more than 17 years of experience on average. 

Strategic Tax Planning for Business Growth

Tax considerations for small businesses don't end in April. It's important to embrace a proactive, year-round tax planning process that supports growth initiatives while maintaining compliance, especially amid uncertainty and ever-changing tax laws and rules. 

Planning for Long-Term Tax Growth

Long-term tax planning is a combination of tactics that will reduce your tax liability, empowering you to allocate those resources elsewhere, including reinvesting into your operations.

Deferring small business income and accelerating deductions is an excellent long-term tax-saving strategy. When you defer your business income, shifting it from one tax year to the next, you can potentially lower your tax bracket and overall tax liability. This shift to a lower tax bracket may qualify you for deductions unavailable to businesses in higher brackets. The tax deductions your business qualifies for will lower your tax liability further, minimizing the amount you will pay to the IRS.

Your industry, region, and entity structure will impact your long-term tax planning strategy.

Building a Resilient Tax Strategy

Building a resilient tax strategy depends on understanding your business's financials, foresight, and adaptability to stay on top of changing tax laws, regulations, and economic conditions. Businesses are grappling with strategic and tactical adjustments to navigate global tariff shifts and challenges.

If you're struggling to draft a resilient tax strategy, engage the services of a tax professional who can tailor a go-forward strategy for your small business, even in times of economic uncertainty. 

Unlocking the Potential of Tax Management with 1-800Accountant

This extensive guide will give you valuable insights into tax loopholes, deductions, credits, and other considerations you need to ensure compliance while embracing long-term growth strategies. 1-800Accountant, America's leading virtual accounting firm, is uniquely positioned with its blend of professionals and technology to guide you through these complexities while maximizing your annual tax savings.

Save time and achieve your annual financial goals with our suite of affordable, tax-deductible financial services. Schedule a quick consultation–usually 30 minutes or less—to learn how bookkeeping, tax advisory, and business tax preparation and filing will help your business maintain full IRS compliance with maximum tax savings.