Tax-Saving Strategies for Small Businesses in 2025

As 2025 gets underway, business owners should be proactive in finding ways to trim their tax bills. This year is especially important because it’s the final year for certain benefits from the 2017 Tax Cuts and Jobs Act (TCJA). By taking action now, small and medium-sized businesses can reduce taxable income and maximize available deductions and credits. Below are several strategies, from timing income and expenses to leveraging special deductions, that can help minimize your federal and state taxes for 2025.

Time Income and Expenses Strategically

Determining when your business recognizes income or pays expenses can impact your 2025 tax liability. If you expect to be in a similar or lower tax bracket next year, consider deferring some income into 2026 (for example, delaying December invoices to January) and accelerating deductible expenses into 2025. Prepaying expenses like office rent, supplies, or vendor fees before year-end can boost your deductions for 2025. On the other hand, if you suspect tax rates might rise (as current law would raise individual rates after 2025), you might accelerate income into 2025 to take advantage of today’s lower rates. The key is to project your business’s performance and consult your CPA on the optimal timing. Proper timing can defer taxes and improve your cash flow, but be mindful of IRS rules (for instance, cash-basis businesses have more flexibility in timing than accrual-basis). Always document your approach and stay within allowable guidelines.

Maximize Deductions on Business Investments

Take full advantage of tax provisions that let you write off asset purchases. Section 179 expensing allows small businesses to immediately deduct the full cost of qualifying equipment, machinery, software and other assets. For 2025, the Section 179 limit is $1.22 million in purchases (increased for inflation), with a phase-out starting at $3.13 million. This means you can expense up to $1.22 million of equipment acquisitions rather than depreciating over years, which is a huge benefit for capital-intensive businesses.

Even if you exceed the Section 179 cap or buy assets not eligible for it, bonus depreciation is another tool: in 2025 bonus depreciation allows you to immediately deduct 40% of the cost of new qualifying assets. For example, if you purchase a new work vehicle or heavy machinery, you could expense a large portion (or all) of it this year through Section 179 and bonus depreciation combined. Be aware that some states do not fully conform to these federal rules, you may have add-back adjustments on your state return, but the federal tax savings can be substantial. Always keep detailed records (invoices, purchase dates and documentation of business use) to support these deductions in case of an audit.

Leverage Retirement Plans for Deductions

Contributing to retirement plans is a win-win: it saves you taxes now and helps you and your employees save for the future. Small business owners have several tax-advantaged retirement plan options. For instance, a 401(k) plan allows an owner-employee to defer up to $23,500 of salary in 2025 (plus an additional $7,500 catch-up if age 50+). In addition, the business can contribute (via profit-sharing or matching) on the employer side. Combined employee + employer contributions can reach $70,000 for 2025, all of which are deductible to the business. 

If you’re self-employed or have only a few employees, options like a SEP-IRA are simple and let you contribute up to 25% of net income (capped at that same $70,000 limit). These contributions reduce your taxable business income dollar-for-dollar. For example, if your company has a strong 2025 and you contribute $50,000 into a 401(k)/profit-sharing plan for yourself (and perhaps additional for employees), that $50,000 is not taxed as current income. Beyond deductions, there are also tax credits available for retirement plans: if you don’t have a plan yet, the IRS offers a startup credit (up to $5,000 per year) to small businesses that newly establish a 401(k) or SEP. This helps offset setup costs. Using retirement plans thus serves both your tax strategy and your long-term financial goals.

Tap Into Valuable Tax Credits

Tax credits directly reduce your tax liability dollar for dollar, and many credits are designed for small businesses. Make sure you explore and claim any credits your business qualifies for. Some notable examples include:

• Research & Development (R&D) Credit – If your company is investing in new product development, software, processes, or other innovation, you may be eligible for the federal R&D tax credit. This credit can offset income tax (and even payroll tax for certain new businesses) based on qualified R&D expenses. It remains available in 2025 and can be a significant savings for technology, manufacturing, or engineering-focused firms. Note: Due to a recent law change, you must spread out R&D expenses over 5 years rather than deduct immediately, but the R&D credit is separate and still provides a benefit.
• Work Opportunity Tax Credit (WOTC) – This federal credit rewards businesses for hiring individuals from certain targeted groups that face employment barriers (for example, veterans, recipients of certain government assistance, or long-term unemployment recipients). Depending on the employee hired, WOTC can credit your business up to $2,400 (or more for certain categories) against taxes for each qualified new hire. If you’re expanding your team, screening for WOTC eligibility is worth the effort.
• Small Business Health Care Tax Credit – If you have fewer than 25 employees and provide health insurance with a qualifying plan, you might qualify for a credit of up to 50% of the premiums you pay for employees’ health coverage. This credit is designed to help offset the cost of offering employee insurance. There are wage and coverage requirements (e.g. it phases out for higher average salaries), but it’s extremely valuable for very small companies offering healthcare benefits.
• Clean Energy and Vehicle Credits – Thanks to recent legislation, businesses going green can reap tax rewards. For example, the commercial clean vehicle credit can provide up to $7,500 for purchasing a qualifying electric passenger vehicle for business use (and up to $40,000 for larger commercial vehicles). Installing solar panels or other renewable energy equipment at your business location could qualify for a federal investment tax credit (typically 30% of the cost). Additionally, certain building improvements that increase energy efficiency might earn credits or deductions (such as the Energy-Efficient Commercial Buildings deduction). These incentives not only reduce your taxes but also lower long-term operating costs through energy savings.

Keep in mind that many states offer their own tax credits as well. Check your state’s tax agency website for business credit programs. Credits often come with specific qualification rules and paperwork, so work with your tax advisor to identify applicable credits and ensure you meet all requirements.

Optimize Your Business Structure

It’s wise to periodically review whether your current business entity type is the most tax-efficient for your situation. Small businesses are typically structured as sole proprietorships, partnerships, S corporations, or C corporations – and each comes with different tax implications. For many profitable small businesses, electing S corporation status can yield tax savings by reducing self-employment taxes. S corporation owners split their business profits into two parts: a salary (subject to payroll taxes) and a distribution (not subject to self-employment tax). By paying yourself a reasonable salary and taking remaining profits as distributions, you reduce the amount of income hit by Social Security and Medicare taxes. Important: The IRS requires the salary to be reasonable for your role and industry, so you cannot underpay yourself just to avoid taxes. Work with an accountant to determine an appropriate salary benchmark.

If your business is a C corporation, the flat 21% corporate tax rate can be attractive, especially if you reinvest profits and don’t distribute them. However, watch out for the double taxation issue: if you take profits out as dividends, those dividends are taxable to you personally. One strategy for C-corps is to pay owner-employees a reasonable salary or bonus (which the corporation can deduct) instead of solely taking dividends. This avoids the IRS reclassifying excessive salary as a nondeductible “disguised dividend”. Keeping salaries at market-appropriate levels ensures the corporation gets the deduction and minimizes overall tax 

The right structure for your business depends on profits, growth plans, and whether you plan to distribute earnings. LLCs and partnerships offer flexibility, so discuss with your HBLCPA representative what entity type best suits your tax planning. Changes in tax law after 2025 could also influence this; for instance, if individual rates rise, a C-corp might look relatively more appealing for some businesses, whereas if rates stay low, pass-through treatment is generally beneficial.

Don’t Overlook State Tax Opportunities

State taxes are a critical piece of the puzzle. Many business owners focus only on federal taxes, but optimizing state tax outcomes can also yield savings. One major consideration is the State and Local Tax (SALT) cap workaround for pass-through businesses. Under current federal law, individuals can only deduct up to $10,000 of state and local taxes on their personal return. However, most states with income taxes have enacted optional pass-through entity (PTE) taxes that your S-corp or partnership can pay at the entity level. By electing to pay state tax through your business, the business deducts the full state tax paid as a business expense (not subject to the $10k cap) and you typically receive a credit on your state return. In high-tax states, this can significantly reduce your federal taxable income and overall tax bill. Check if your state offers this election and consider opting in for 2025 if it makes sense.

Also, be aware of other state-specific tax breaks. For example, states often have investment credits, training credits, or zone-based incentives that could apply to your expansion or purchases. If you’re purchasing equipment, note that some states decouple from federal bonus depreciation or have their own depreciation schedules, so your state taxable income might be higher than federal in the year of purchase. Plan for those differences to avoid surprises.

Plan Ahead and Stay Informed

The tax landscape for businesses is continually evolving. Besides the strategies above, note that some provisions are temporary. For instance, the 20% qualified business income (QBI) deduction for pass-through entities is still available in 2025, but unless extended it will sunset afterward. Similarly, current individual tax rates (which affect many small business owners) are set to increase in 2026. These potential changes make year-end 2025 a crucial time for planning. By acting now to defer or accelerate income, invest in your business, and utilize deductions and credits, you can position yourself to save on this year’s taxes and brace for the future. 

Consider engaging a tax professional for personalized guidance. Every business’s situation is unique, and a CPA or tax advisor can help you navigate complex rules (like depreciation recapture, passive loss limitations, or multi-state filings) and identify niche incentives you might have overlooked. With informed planning and the strategies above, small and medium-sized business owners can confidently reduce their 2025 income taxes, keeping more hard-earned profits in the business for growth. Proactive planning and consultation now can pay off in a lower tax bill come filing season, letting you reinvest those savings back into your company’s success.