Taxes can be a killer for entrepreneurs. Fortunately, deductions are a great way to reduce tax liability. But how do you know what you’re eligible for? Instead of combing through endless pages of information on the Internal Revenue Service website, it’s easier to lean on the knowledge of experts.
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Check out these four deductions that can save entrepreneurs big money come tax time.
Choose the Correct Entity Type for Your Business
“For example, in a sole proprietorship, you will pay self-employment taxes (Social Security and Medicare) on the entire net income, which can be high if the business is profitable,” said John Adams, CPA, firm owner, tax planning and fractional CFO expert at Bridgewater Tax and Financial Consulting in Jupiter, Florida “Self-employment tax has a combined Rate: 15.3% on net earnings up to $176,100 (12.4% Social Security + 2.9% Medicare). Earnings above $176,100 are subject only to the 2.9% Medicare tax, plus the additional 0.9% Medicare tax on earnings exceeding the specified thresholds.”
Adams said that if a business is an S-corporation, the entrepreneur must avoid the double taxation of a C-corporation because profits are taxed at the shareholder level, not the corporate level.
“Also, you may benefit because you may benefit from self-employment tax savings,” he continued. “Shareholders can take a reasonable salary and distributions. Only the salary is subject to self-employment tax, while distributions are not. This means if reasonable compensation is $100,000 and you made $176,100, then you can realize a tax benefit on the $76,100 that would not be subject to self-employment tax. This would give you a tax benefit of $11,643 in self-employment taxes saved.”
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Plan for Retirement Savings
Using the example above, Adams said that if you save 10% of your $100,000 in a traditional 401(k), you would be in a 24% tax bracket.
“You would pay tax without a 401(k) of $24,000 and Tax with a 401(k) of $21,600 — a tax savings of $2,400,” he explained.
Take Advantage of Home Office Deductions
Adams said that if you take advantage of the home office deduction, you may receive deductions for mortgage interest, property taxes, utilities and maintenance.
“These are based on a percentage of your office space and the size of your home,” he said. “For example, if you live in a 2,000-square-foot home and your office space is 200 square feet, you would get 10% of all eligible expenses. If all those expenses added up to $10,000, you would get $1,000. At 24%, this would get you $240.”
Be Aware of the Foreign Derived Intangible Income Deduction
Crystal Stranger, senior tax director and CEO at Optic Tax Inc., said that one big deduction that many entrepreneurs are unaware of is the Foreign Derived Intangible Income (FDII) deduction.
“This is only available to corporations but reduces the tax rate by 1/3 on sales of most items made outside the US,” she explained. “So this can reduce the effective tax rate from the 21% corporate tax rate to 13.125%. Sometimes, this alone can make restructuring to a corporation worthwhile, especially if selling intangibles such as software or video game assets as much of those sales are internationally based.”
New Tax Credits or Deductions for 2025
Stranger said there are none yet, but that may quickly change once Trump is back in office.
“The Tax Cuts and Jobs Act (TCJA) is set to expire at the end of 2025, so this will give a lot of pressure to make sweeping tax changes again this year, or in early 2026 in order to extend many of these very popular tax laws,” she explained.
Possible Pitfalls When Claiming Deductions
“The biggest issue I normally see is related to the Section §179 Research and Development expenditures,” said Stranger. “Many entrepreneurs do not realize that any research costs or software development expenditures must be amortized over five years — if done within the U.S. — or 15 years if using an overseas team. This can have a huge impact on tax for startups and can lead to taxable income even when a company has negative cash flow overall, so it needs to be managed carefully by any software development company in the early years of receiving income.”
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This article originally appeared on GOBankingRates.com: 4 Tax Deductions for Entrepreneurs That Could Save You Thousands in 2025
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