Many tax breaks, limitations and additional taxes tee off of adjusted gross income (AGI) or modified adjusted gross income (MAGI). For example, you’ll avoid the
0.9% additional Medicare tax on earned income if your AGI does not exceed $200,000 (single) or $250,000 (married filing jointly). Despite other tax cuts that were part of the Tax Cuts and Jobs Act of 2017, this tax, which was intended to help pay for the Affordable Care Act, is still in effect.
You may need to reimburse employees for:
- Travel
- Entertainment
- Tools
However, before you do so, you’ll want to make sure you use a reimbursement plan that meets the IRS requirements. This is called an accountable plan. With this plan, the business deducts the expenses but does not report the reimbursements as income to employees, potentially saving the company employment taxes and lowering taxable income overall.
Also, if your company does not already offer an accountable plan for employee reimbursement, your employees will likely soon be asking you for one. Under the new tax law, employees cannot deduct miscellaneous
unreimbursed employee expenses. Giving your employees an accountable plan for reimbursements can help your employees save money on taxes, as well as helping the business. It’s a win-win.
There are several ways to reduce taxable income by being strategic about your business expenditures. For example, you are allowed to deduct the cost of acquiring machinery and equipment in full, upfront, up to a set dollar amount. In 2025, the One Big Beautiful Bill Act (OBBB) signed into law an
expensing cap increase to $2.5 million, up from the previous $1 million limit set by the 2018 tax law. Business can now deduct the full cost of qualifying equipment, software and property improvements up to $2.5 million in the year the assets are placed in service.
However, if your business is just starting up or is not yet profitable, you can ask your accountant about depreciation for these items. It might be better for your overall tax situation if you can spread out the value of the purchases across your future tax years instead of deducting the full purchase price all at once. This can help produce deductions for future years when these assets may be more valuable to you.
For example, if you are in the 12% tax bracket now but expect to be in the 35% bracket in the future due to increased profitability, a $10,000 deduction would have you currently saving only $1,200 in taxes. Depreciation over five or seven years (depending on the type of item) would produce total savings in the 35% bracket of $3,500, or $2,300 more in tax savings. With bonus depreciation now reduced to 40% in 2025, and Section 179 of expensing capped at $1.25 million, it’s more important than ever to evaluate whether spreading out deductions over time algins better for your long-term tax strategy.
Other options to ask your accountant about:
- Deducting vehicle expenses based on actual costs or the IRS mileage allowance (currently 70 cents per mile for self-employed and businesses)
- Deducting home office expenses based on actual costs or the IRS simplified rate. The current standard deduction is $5 per square foot up to 300 square feet of space.
- Claiming disaster losses on prior-year returns rather than on the return for the year in which the disaster occurs.
Another method for how to save tax is that in addition to claiming disaster losses, you can also consider deducting the
business insurance expenses that you pay every year. IRS form 1040 can help you determine your business insurance deduction. The following is a list of different business insurance coverages that you can deduct:
Because unscrupulous people sometimes form small businesses as a fraudulent means to cheat on taxes, the IRS has begun to more heavily scrutinize small business filings to make sure the companies are legitimate businesses, and not just tax shelters. Small businesses that are registered as the following should consider seeking professional assistance in learning what insurance premiums can be deducted as legitimate business expenses:
- Single person LLCs
- Sole proprietorships
- Separate entities
Certain deductions and credits have limitations that can prevent you from using them fully in the current year but could permit a carryover to future years and carryovers are a way to reduce taxable income. Keep track of carryovers so that you won’t forget to use them in future years. This is done automatically by most tax preparation programs and should be done by tax professionals you may use. Examples:
Salary, bonuses, and distributions of your share of business profits are taxable. However, there are ways in which you can possibly benefit from your business’s success without triggering the tax. Consider talking to your accountant about:
- Tax-free fringe benefits, including medical coverage, health savings accounts, and retirement plans.
- Loans by the business to you on a no- or low-interest basis. If the loan interest is below IRS-set rates (also known as Applicable Federal Rates), the business may have to report interest from this arrangement. But with interest rates low, this isn’t too costly these days.
