What Is Tax Planning for Small Business?

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  • Written By: Kristie Lorette
  • Edited By: O. Wallace
  • Last Modified Date: 10 September 2019
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Tax planning for small business entails the strategies that the owner or owners use to establish and run the business to maximize tax benefits and minimize tax payments. These tax strategies start when the business owner decides on how to structure the business and and how the business treats various expenses and assets. Just as a new business owners writes out a business plan to follow to reach profit goals, tax planning for small business plays a pivotal role in this process.

The primary tax planning for small business starts with choosing the type of business entity the business will be structured as. Business owners can choose to open the business as a sole proprietor, partnership, limited liability company (LLC) or corporation. Each type of business entity has its own advantages and disadvantages when it comes to tax planning for small business.

For example, a sole proprietor does not have to file separate tax returns. The sole proprietor shows the business income and losses on their personal federal tax returns. A corporation, on the other hand, files corporate tax returns and then each of the corporation officers must file any income or dividends they receive from the corporation on their own personal federal and state tax returns.


Tax planning for small business has the primary goal of maximizing the tax write offs or deductions for the business. By doing so, this reduces the amount of taxes that the small business is required to pay. By talking to a tax advisor or turning to Internal Revenue Service (IRS) publications, small business owners can make decisions that allow them to meet these goals.

For example, if the business is a home-based office, then the business owner should be aware of the tax deductions allowable for a home business. Tax planning for a small business run from a home-based location allows the business to deduct a portion of the mortgage interest or rent payment, a portion of the electricity, business phone and other expenses.

In order for a business owner to make educated decisions about the business, it is imperative to go through the process of tax planning for small business. The business owner will learn how to handle self-employment tax and how to establish the business so that it receives the maximum amount of profits while keeping its tax bill as low as possible.


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