Tax Strategy for Entrepreneurs: Best Practices for Reducing Business Taxes
- David Rim
- Jan 21
- 3 min read
Updated: Jan 28
Business owners often think tax savings happen at filing time. We have found that our clients get the most effective tax savings from year-round tax strategy and planning, not last-minute tax preparation.
Understanding how tax strategy works helps entrepreneurs reduce taxes legally, improve cash flow, and avoid costly surprises.
This guide covers the tax planning best practices every entrepreneur should understand.
Tax Prep vs. Tax Strategy: What Business Owners Need to Know
One of the most common misconceptions among entrepreneurs is confusing tax preparation with tax strategy.
Tax preparation focuses on:
Reporting past activity
Filing accurate tax returns
Meeting compliance deadlines
Tax strategy focuses on:
Planning ahead to minimize taxes
Structuring the business efficiently
Making informed decisions before transactions occur
Best practice:
Entrepreneurs should treat tax strategy as an ongoing process, not a once-a-year event.
Filing a tax return keeps you compliant.
Tax strategy helps you keep more of what you earn.
Choosing the Right Entity Structure (LLC vs S-Corp vs C-Corp)
Your business entity structure plays a major role in how much tax you pay and how complex your compliance becomes.
Common entity types include:
Sole proprietorships
Partnerships
Limited liability companies
Corporations
What you need to remember is that your entity structure is a legal designation. Each of these entity types can have different tax elections and consequences.
Sole Proprietorships
Many owner’s simple file a “D/B/A” instead of creating a separate entity. The activity of the business gets reported on Schedule C of the owner’s personal tax return.
Partnerships
Taxes are passed through to the owners of the business via a K-1, avoiding double taxation.
Limited Liabilities Companies
Even if a separate entity with a separate EIN is created, if there is only one owner (“Single Member LLC”), the activity of business gets reported on Schedule C of the owner’s personal tax return.
If there is more than one member, this entity gets treated as a partnership for tax purposes (see partnerships above).
Corporations
Corporations are separately taxed entities. The business itself pays income tax and any dividends paid to the owner(s) is taxed at as dividend income (this is the double taxation referred to in the partnership section).
The stock of a corporation may be designated as a qualified small business stock (QSBS) which may provide significant tax advantages based on your long term business plan.
A corporation may make an “S” election (S-corp). An S-corp is also a pass- through entity and avoids double taxation, similar to partnerships. An S-corp may also provide other tax benefits and is a very popular election for small business owners.
Best practice:
Entity selection should be based on profitability, growth plans, and owner involvement, not simply what was easiest or cheapest to set up initially.
Many businesses operate for years in an entity structure that no longer fits, resulting in unnecessary taxes.
Reasonable Compensation and Owner Pay: Getting It Right
For S-Corporation owners especially, how you pay yourself matters.
Key concepts include:
Salary vs distributions
Payroll tax exposure
IRS “reasonable compensation” standards
Common mistakes:
No payroll for owners
Owner salaries set artificially low
Inconsistent or undocumented pay practices
Best practice:
Owner compensation should be reasonable, consistent, and defensible based on the role the owner actually plays in the business — not optimized solely for tax savings.
Done correctly, owner pay planning can reduce taxes and lower audit risk.
Commonly Missed Business Deductions and Planning Opportunities
Many missed tax savings are not about obscure deductions, they’re about process gaps.
We often see issues related to:
Incomplete or delayed bookkeeping
Poor expense categorization
Uncoordinated retirement or benefit planning
Improper handling of home office or asset usage
Income and expense timing decisions made without strategy
Best practice:
Accurate, timely bookkeeping is the foundation of effective tax strategy. Without reliable financial data, planning opportunities are either missed or become risky.
Why Integrated Bookkeeping and Tax Strategy Matters
Tax decisions affect more than just your tax return. They directly impact:
Cash flow
Owner compensation
Hiring decisions
Long-term profitability
Best practice:
Tax planning works best when it’s integrated with bookkeeping and financial reporting, not handled as a separate, year-end exercise.
When financials and tax strategy work together, business owners gain clarity, predictability, and fewer surprises.
Tax Strategy Best Practices for Entrepreneurs (Summary)
To improve your tax position over time:
Revisit your entity structure as your business grows
Pay yourself intentionally and consistently
Keep books accurate and up to date
Consider tax impact before major decisions
Treat tax planning as a year-round process
Get Help With Ongoing Tax Strategy
Every business has unique facts, goals, and constraints. Effective tax strategy requires more than software or a once-a-year tax return.
If you’d like a second set of eyes on your entity structure, owner compensation, or overall tax planning approach, we offer ongoing tax strategy and integrated bookkeeping support designed to scale with your business.
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