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Running a business can feel like climbing a mountain. Just when you think you're getting to the top, you discover a whole new level of challenges: corporate tax accounting. As you work to keep your business afloat and achieve your financial goals, you find out that your level of success is directly linked to how much you can lower your tax liabilities. Fortunately, there are some strategies that can help you reduce your corporate tax burden. In this article, we'll explore the best plan for reducing tax liabilities for startups.
Haven can help you implement these strategies, enabling you to achieve your financial goals and enjoy your journey to the top. Our accounting services for small businesses ensure you have the support you need to succeed.
Table of Content
What Counts as Taxable Income?
As your business grows, revenue becomes more critical to your success. But not all the money that comes into your business is taxable income. Taxable income includes any revenue you earn from your business operations. So, if you’ve earned it by selling products or services, it’s likely taxable. This includes:
Payments from customers or clients
Royalties
Licensing fees
Subscription income
Tips and service charges (for certain businesses)
Some types of grants (depending on terms and use)
It also includes debt that is forgiven (yes, that can be considered taxable in some cases) and interest earned on your business bank accounts. So if you’ve earned it through operations, it’s probably taxable. If you were given it to build your company (like equity financing), it’s perhaps not.
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What's Your Business’s Tax Liability
If you’re running a for-profit business in the U.S., taxes are unavoidable. But how your business is taxed depends on how you’ve chosen to be taxed (your tax election), not just your legal structure. That’s an important distinction that often trips up many founders.
Let’s say you’ve set up a single-member LLC. By default, it’s taxed like a sole proprietorship. But you can elect to be taxed as a C corporation instead. That flexibility gives you options, but it also means you should talk to a tax advisor before making any big decisions.
How Different Business Types Are Taxed
In general, your startup will be taxed in one of two ways:
As a C Corporation
This is the default for most venture-backed startups and bigger companies. You pay a flat 21% federal corporate tax, and your business files its return.
As a Pass-Through Entity
This includes sole proprietors, LLCs, S corporations, and partnerships. The business income "passes through" to your tax return. Thanks to the Tax Cuts and Jobs Act (TCJA), many of these businesses can deduct up to 20% of their qualified income, although that benefit may expire at the end of 2025.
The Main Types of Taxes You’ll Need to Handle
1. Corporate Income Tax
If you're taxed as a C corp, you’ll need to file Form 1120 every year, even if you didn’t make any money. On top of the federal 21% rate, many states charge their corporate income taxes (though a few like Nevada and Wyoming don’t).
2. Payroll Taxes
Hiring employees? Congrats, and welcome to the world of payroll taxes. You’re responsible for withholding and paying:
Federal income taxes
Social Security and Medicare (FICA)
Federal unemployment tax (FUTA)
State payroll taxes (if applicable)
Messing this up can get expensive fast. We’re talking about penalties, back taxes, and potentially jeopardizing your next funding round during due diligence. If you’re unsure, this is 100% worth outsourcing to a payroll provider or accountant.
3. Sales Tax
If you’re selling products or services, you’ll need to collect and remit state sales tax in any state where you have “nexus.” That could mean you have a physical presence there, employees, or you’ve hit a certain revenue threshold in that state.
Many startups don’t realise they have sales tax obligations in multiple states until it’s too late. Then they’re stuck paying back taxes, penalties, and interest. Get clear on this early.
4. Other Taxes
Depending on what you do and where you’re based, you might also run into:
Franchise tax: charged by some states just for the privilege of doing business
Excise tax: if you deal with specific goods like fuel, tobacco, etc.
Use tax: for items you bought out of state but use in-state
Property tax: on your office space or equipment
Stay Ahead of Tax Code Changes
The tax landscape changes more often than you’d think. The last major shake-up was the TCJA in 2017, which introduced features such as the flat 21% corporate rate and the 20% QBI deduction for pass-through entities.
Many of those perks expire at the end of 2025, unless new legislation extends them. The takeaway? Don’t assume the tax code will look the same year to year. Make sure someone on your team (ideally, your accountant) is keeping tabs on this stuff.
Haven: Full-Stack Finance for Startups
Let your business take flight while Haven manages your financial runway. Built by founders for founders, we handle everything from daily bookkeeping to complex tax filings and R&D credits that put cash back in your pocket, as well as fractional CFO services.
Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline - all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses.
Book a call today to learn how our dedicated team can help you focus on building rather than bookkeeping.
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9 Best Strategies on How to Lower Tax Liabilities
1. Boost Employee Retirement Plans for Big Tax Savings
Having a retirement plan for your employees and contributing to it can help you save on taxes. Develop a suitable plan for your employees and contribute to its implementation.
Maximize Tax Savings Through Retirement Contributions
If you already offer a retirement plan, ensure you are contributing to it optimally. Depending on the type of plan and your contribution, you may qualify for multiple tax benefits, including the following:
Employer contributions to retirement plans are tax-deductible, lowering your taxable income
Retirement plan startup costs and tax credits provide even more savings
Contributions to employee retirement accounts can help attract and retain talent
The SECURE Act 2.0 allows you to contribute even more to eligible retirement accounts. Crunch the numbers and determine the optimal amount to contribute to employee retirement accounts to reduce your tax liability.
2. Tax-Free Employee Expense Reimbursements
The IRS allows you to reimburse employees for a wide range of job-related expenses. Some of the expenses you may be able to reimburse employees for include the following:
Travel expenses, including flights, lodging, and meals
Business use of personal vehicles
Internet and phone costs for remote or hybrid employees
You'll need to accurately track these expenses throughout the year and document every reimbursement. You need an auditable paper trail that supports the deductions you list on your tax documents.
Tax-Free Reimbursements Under an Accountable Plan
When you follow IRS guidelines for an accountable plan, these reimbursements do not count as taxable income for the employees. Ensure that you don't reimburse expenses as part of employees' paychecks. Instead, issue separate reimbursement payments so you and your team members reap the tax benefits from this program.
3. Health and Dependent Care Benefits Can Save You Big on Taxes
Providing health insurance and dependent care assistance can be a strategic way to reduce your taxable income while offering valuable benefits to employees. Depending on your business size, the following tax benefits may be available:
Premiums paid for employees under a group health plan are tax-deductible.
If your business has fewer than 25 employees and pays at least half of their premiums, you may qualify for the Small Business Health Care Tax Credit.
You can offer tax-free dependent care benefits to employees to reduce the tax burden on your business and your team members.
These tax-friendly benefits not only help you save on taxes but also boost employee morale and retention. If you are already offering these types of perks, make sure you are taking advantage of the tax credits your business qualifies for.
4. Buy New Equipment Before Year-End for Tax Benefits
Does your business need new equipment or vehicles? Is it time for a tech upgrade? You can make these purchases at any time during the tax year and claim them as deductions to lower your taxable income for the year.
Reduce Tax Liability with Smart Asset Purchases
Section 179 of the Internal Revenue Code allows you to claim these as immediate expense deductions. Before buying new assets, consider the following:
Alignment with business needs: Don't buy unnecessary assets just for tax benefits
Cash flow: While deductions help lower taxable income, they still require an upfront investment that can impact your cash flow
IRS limits: Some deductions have maximum limits depending on the asset type and your company's income
Focusing on necessary tax-deductible upgrades is a smart way to invest in your business while reducing its tax liability.
5. Research and Development Tax Relief
R&D tax credits are very underrated. There is a misconception that research and development tax credits are only available to industries where groundbreaking research is being conducted. This is not strictly true.
Suppose you are investing tangible capital or human capital in innovating a product, improving your product/service, or even identifying a process for the industry. In that case, all of these can qualify as research and development investments. These investments can then make you eligible for the R&D tax credit, which can lower the tax burden.
6. Work on Capital Allowances
Capital and investment allowances are specific amounts of money that are not counted towards taxable income. These are allowances that are related to business operations, such as plant and machinery, or other equipment.
Which company assets qualify for this capital allowance is dependent on your local authority. But they help reduce tax liability, particularly if these costs are very high for your business. It’s a good idea to check with your compliance team to determine which of your assets can be categorized as an allowance and written off.
7. Pay Yourself a Salary
Not many businesses consider this, but paying directors and executives is a great way to lower the tax burden. Salaries are considered a business expense, so paying yourself can be deducted from your taxable income.
The benefit of being in this position is that you can choose your salary. It is wise to remember that your salary will be included in your taxable income. Therefore, calculate in advance how much you should take home to avoid liability for both the business and yourself.
8. Charitable Contributions Can Help Your Community and Reduce Your Tax Burden
Giving back to the community and planet is essential; it is also very beneficial. CSR budgets (Corporate Social Responsibility) are among the most significant expenses that businesses utilize for tax write-offs.
If you’ve ever been to a department store and had the clerk ask you to round up your bill for charity, then that is one way the business is minimizing its tax liability. Charitable donations can result in tax deductions of up to 25%. They are also a good way for your company to showcase its values and enhance its employer branding.
9. Stay Up to Date on Tax Laws to Help You Save
It cannot be stressed enough that the best way for you to reduce your corporation tax liability is to stay up to date on tax laws. Tax laws change annually, as do the national and state budgets. What might be taxable one year might not be the next.
To always be aware of your taxable income and all the deductions you qualify for, you need to keep yourself updated on how tax laws are changing.
Common Tax Mistakes Startups Make
Many founders assume they’re too early or not profitable enough to qualify for tax credits. But some credits are refundable or can offset payroll tax liabilities. You could see a real cash benefit now, not just down the road when you turn a profit.
The R&D Tax Credit, for instance, is one of the most underused incentives in the startup world. If you’re building a tech product, platform, or tool, odds are, you qualify. The same goes for credits tied to hiring, healthcare, or energy-efficient improvements, depending on your location and setup. There’s money on the table, and a lot of founders walk right past it.
Plan for Tax Cash Flow
One of the most common (and painful) mistakes is not setting aside cash for taxes. Even pass-through entities, such as LLCs and S corporations, must plan for quarterly estimated taxes, particularly when founder income is involved.
This becomes even more critical if your startup starts generating revenue while you're still operating in a lean mode. Tax bills often feel like they hit at the worst possible moment, usually when you're mid-fundraise or heads-down building.
Avoid Mixing Personal and Business Expenses
It’s easy to swipe the wrong card or think you’ll sort it all out later. The problem is that mixing personal and business finances is a red flag for auditors.
It also makes bookkeeping messy and raises questions about the legitimacy of deductions. Founders often get tripped up by shared expenses, such as meals, travel, or home office costs, where the business portion needs to be documented.
Keep Detailed or Audit-Ready Records
You don’t need to obsess over receipts, but you do need an organized paper trail. Startups often rely on spreadsheets and screenshots early on, but when you start spending on software, travel, contractors, or equipment, you need a system. If the IRS comes calling (or if you're going through due diligence), they’ll want to see proof.
Book a Call to Learn More About our Accounting Services (Trusted by 400+ Startups)
Haven helps startups and small businesses save time and money with corporate tax accounting. We help you find tax credits and other savings opportunities, enabling you to lower your tax liabilities and access more cash for growth. Our services go far beyond tax filings.
We handle daily bookkeeping and offer fractional CFO services to ensure your business’s finances are always healthy. Join over 400 startups that have saved millions in tax credits and never missed a filing deadline. With 24/7 access to a team of CPAs who understand the unique challenges of growing businesses, you can focus on building rather than bookkeeping.
Book a call today to learn how our dedicated team can help you focus on building rather than bookkeeping.
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