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As a small business owner, you’re likely focused on increasing revenue while keeping costs low. When it comes to taxes, determining how to minimize tax liabilities and maximize profits is a top priority. Unfortunately, this can be easier said than done. The world of corporate tax accounting is complicated, especially for small businesses. Different tax codes, policies, and regulations can change from one year to the next, making it challenging to stay up-to-date. If this sounds like you, don’t panic! This article provides clear insights into tax loopholes for small businesses, helping you reduce your liabilities and retain more money in your pocket.
One way to establish a strong foundation for your business is to enlist the help of a seasoned accounting firm, such as Haven. We specialize in accounting services for small businesses and can help you learn about tax loopholes for startups and small businesses to reduce liabilities and improve cash flow.
Table of Contents
7 Tax Loopholes for Startups And Small Businesses To Reduce Tax Liabilities
Book a Call to Learn More About our Accounting Services (Trusted by 400+ Startups)
What Do We Mean by 'Tax Loopholes'?
Tax loopholes are legal strategies that enable small businesses to reduce their tax liability. These strategies are embedded within the tax code and offer opportunities to reduce tax bills. When it comes to tax loopholes, most people think of something shady and illegal that the rich use to avoid paying their fair share of taxes. In reality, tax loopholes are a regular part of the tax code that promote certain behaviors. For instance, when you hear that a business has “found a loophole,” what they mean is that they’ve discovered a legal way to reduce their tax burden. The truth is that tax loopholes can save small businesses a substantial amount of money. For startups, these strategies can mean the difference between success and failure.
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Understand Your Startup's Tax Liability
Starting a new business is no small task, and as a business owner, you have a lot to manage, including your startup’s tax liability. This term refers to the total amount of taxes your business owes to the government. The Internal Revenue Service calculates this amount based on your taxable income and the deductions, credits, or exemptions you qualify for. You need to know your tax liability to comply with tax laws and make informed business decisions that help your company’s bottom line. Accurately calculating your tax liability is crucial. Miscalculated taxes can lead to fines and extended payment plans. If this occurs in the early years of your company, you may find yourself playing catch-up on payments during a critical growth period. The sooner you pay what you owe, the better.
Types of Taxes and Their Impact on Startups
Different taxes have different impacts on your startup. Here are the common tax types and how they play into your company’s tax liability.
Federal Business Income Tax Rate
Your federal income tax rate is calculated as a percentage of your business profits, either using a flat rate (if you’ve elected to be taxed as a C corporation) or a progressive tax bracket system (if you classify as a pass-through entity).
C Corporation Taxation Election
Most technology startups and large companies are taxed as C corporations and pay a flat 21% federal income tax rate on their profits. It’s crucial to emphasize that tax is levied on business profits, which may be low or negative if you’re prioritizing growth over profitability. Calculating the amount of business income in each state can be complex for companies, particularly those that conduct business online or across state lines.
State Tax Apportionment and Form 1120-C Reporting Requirements
States use one of three tax apportionment formulas to determine the percentage of income subject to each state’s tax. Once you know your taxable income for each state, you’ll have to follow each state’s unique taxation system. Currently, forty-four states impose a corporate income tax, of which 29 states and D.C. have a flat-rate corporate tax system.
Even if your company does not expect to generate a profit this year, you’re still required to file a Form 1120-C reporting your business’s:
Income
Expenses
Taxable income
Pass-Through Entity Taxation Election
Pass-through entities, which are more commonly used for small businesses and non-venture-backed companies, are not taxed at the business level. Instead, the business’s profits and losses are passed through to the owners' tax returns. This means that, rather than facing a 21% flat income tax rate, owners of pass-through entities are subject to the same federal income tax brackets as individuals.
Pass-Through Entity Taxation: Understanding State-Specific Income Tax Impact
Owners of pass-through tax entities pay state income taxes according to their respective income tax rates, which vary from state to state. Similar to state corporate income taxes, individual income taxes can be subject to a flat tax rate or a progressive tax bracket system based on your state of residence.
Seven states do not impose any state income tax on their residents:
Alaska
Florida
Nevada
South Dakota
Tennessee
Texas
Wyoming
State Business Income Tax Rate
Whether or not you’re required to pay state income taxes on your business profits can be a bit murky. That’s because, unlike federal income taxes, each state has its own state tax laws and regulations, and those can vary significantly from state to state.
Additional Business Taxes To Be Aware Of
While income taxes are typically the primary tax obligation we consider, companies are also subject to several additional taxes based on their employees' locations, state of incorporation, and sales activities. Understanding your total tax liability, including these potentially lesser-known taxes, is another reason why working with a professional business tax expert can be well worth it.
State Franchise Tax
State franchise tax is levied on businesses based on the company’s tax nexus.
Sales Tax
Sales tax is determined by a combination of state and local taxes and is currently levied on businesses across 45 states and D.C., depending on what you are selling to your customers. The highest state-level sales tax is found in California at 7.25% while the lowest levied sales tax in a state is in Colorado, at a rate of 2.9%.
Payroll Tax
Payroll taxes are levied on employers of W-2 employees. Each time you pay a W-2 employee, you’re responsible for paying for half of the employee’s Social Security and Medicare (FICA) taxes, as well as 100% of an employee’s federal unemployment (FUTA) and state unemployment (SUTA) taxes.
Gross Receipts Tax
A small handful of states levy a gross receipts tax, which is a tax applied to a business’s total gross receipts generated in a particular state:
Delaware
Nevada
Ohio
Oregon
Tennessee
Texas
Washington
Gross receipts taxes are usually a tiny percentage of a company’s total sales, typically ranging from 0% to 1%, though some jurisdictions may have higher rates. Most states have phased them out over the years due to the potential tax burden on companies.
Haven's Holistic Financial Partnership 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 with accounting services for small businesses, so you can focus on building rather than bookkeeping.
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7 Tax Loopholes for Startups And Small Businesses To Reduce Tax Liabilities
1. Register Your Business as an LLC
Most startups consider themselves small businesses, but their owners often fail to realize the importance of selecting the correct business entity. One of the best tax-saving tips for LLC companies is that you can evade self-employment taxes and getax benefits. Once you register your business as an LLC, you can go the extra mile and file an S Corporation, which will reduce the amount of taxes you have to pay.
2. Leverage Retirement Contributions
One of the easiest ways to reduce taxable income is by contributing to tax-advantaged retirement accounts. Plans like a Simplified Employee Pension (SEP) IRA, Solo 401(k), or traditional IRA allow you to defer taxes on contributions until retirement. For example, in 2025, small business owners under 50 years old can contribute up to $70,000 to a Solo 401(k). Contributions to traditional IRAs may also be tax-deductible, depending on your income and filing status.
3. Invest in Equipment and Technology Through Section 179
The IRS allows small business owners to deduct the full cost of qualifying equipment and software under Section 179 of the Internal Revenue Code. This incentive is designed to encourage businesses to reinvest in tools and technology.
Eligible items include:
Computers and software
Machinery
Office furniture
Vehicles used for business purposes
The deduction limit for Section 179 is $1,250,000, with a spending cap of $3,130,000. If your business needs new equipment, purchase and place it in service before the end of the tax year to take full advantage of this deduction.
4. Utilize the Qualified Business Income (QBI) Deduction
The QBI deduction, introduced under the Tax Cuts and Jobs Act, allows eligible small business owners to deduct up to 20% of their qualified business income. This deduction is available for:
Sole proprietors
LLCs
Partnerships
S corporations
Eligibility may depend on several factors, including your taxable income and the type of business you operate. For 2025, the income threshold is $364,200 for married couples filing jointly and $182,100 for single filers.
5. Write Off Business Expenses
Keeping track of everyday expenses is one of the simplest ways to reduce taxable income.
Common deductible business expenses include:
Rent for office or retail space
Utilities and internet costs
Business insurance premiums
Advertising and marketing expenses
Travel and meals (50% deductible for meals)
Home Office Deduction: If you run your business from home, you can claim a portion of your rent, utilities, and other home expenses as a deduction. To qualify, the space must be used exclusively for business purposes. Consider using accounting software or apps to track costs in real-time and organize receipts to substantiate deductions during an audit.
6. 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
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 helped medium and small businesses pursue this credit. Although there's no formal process for measuring your business's eligibility, a specific process exists for claiming this credit using IRS Form 6765.
7. Making the Most of State-Specific Tax Benefits
While many tax benefits are available to businesses at the federal level, it is essential 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.
Best Practices and Compliance
Keep Meticulous Records from Day One
Strong recordkeeping isn’t just about staying organised; it’s about being audit-ready and able to justify every claim. You’ll need detailed documentation to claim deductions, R&D credits, or stock-based compensation. Begin with clean bookkeeping practices and ensure your accounting software is tailored to your business structure effectively.
Work with a Tech-Focused CPA
Tech companies have unique tax challenges, deferred revenue, SaaS contract structures, multiple jurisdictions, and stock option plans. A general accountant may miss opportunities or fail to flag risks. Choose a CPA who understands the startup ecosystem and is familiar with the nuances of the tech industry.
Stay Updated with Evolving Tax Laws
Tax legislation changes regularly. Credits, deductions, and thresholds can fluctuate from year to year, particularly those related to innovation and technology. Being unaware of changes could mean missing out on valuable savings or accidentally falling out of compliance.
Always File and Pay on Time
Late filing can quickly become expensive. The IRS imposes a Failure to File Penalty of 5% per month on unpaid taxes, up to a maximum of 25%. Even for early-stage startups, penalties like this can significantly increase your tax liability and reduce your runway.
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Book a Call to Learn More About our Accounting Services (Trusted by 400+ Startups)
Letting a small business take flight is no small feat. Just like an airplane, small businesses can get off the ground, but they need a little help to reach cruising altitude. Haven helps small businesses reach their full potential by managing their “financial runway.” You can think of this as the time and space it takes for a company to stabilize its finances before it can operate independently. Haven services include 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.
Four hundred plus startups use Haven to save millions in tax credits, countless hours of administrative work, and never miss a filing deadline, all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses. Book a call today and discover how our dedicated team can help you with accounting services for small businesses, so you can focus on building rather than bookkeeping.