Most small business owners think about taxes once a year — during filing season. By then, it is already too late to do anything meaningful about your tax burden. The businesses that pay the least in taxes (legally) are the ones that plan proactively throughout the year, making strategic decisions about entity structure, timing of income and expenses, retirement contributions, and available credits well before December 31.
In this guide, our Senior Tax Strategist Michael Rodriguez shares the tax planning strategies that make the biggest difference for small businesses in 2026.
Choose the Right Business Entity Structure
Your business entity structure — sole proprietorship, LLC, S-Corporation, or C-Corporation — has a profound impact on how much you pay in taxes. Many business owners choose their entity type when they first register their business and never revisit the decision, even as their income grows and the tax landscape changes.
For example, a sole proprietor earning $200,000 in net profit pays self-employment tax (Social Security and Medicare) on the entire amount — roughly $28,000 in 2026. An S-Corporation election allows that same owner to pay themselves a reasonable salary (say $100,000) and take the remaining $100,000 as a distribution that is not subject to self-employment tax, potentially saving $14,000 or more per year.
The right entity structure depends on your specific situation: income level, number of owners, growth plans, and state tax considerations. A qualified tax strategist can model the tax impact of each option and recommend the optimal structure for your business.
Maximize Section 199A (QBI) Deduction
The Qualified Business Income (QBI) deduction under Section 199A allows eligible business owners to deduct up to 20% of their qualified business income from pass-through entities (sole proprietorships, partnerships, S-Corporations, and LLCs). For a business generating $300,000 in qualified income, this deduction could be worth $60,000 — reducing your taxable income significantly.
However, the QBI deduction comes with complex limitations based on your taxable income, the type of business you operate, and the amount of W-2 wages and property your business holds. Specified service trades or businesses (SSTBs) — including law, accounting, healthcare, and consulting — face phase-out thresholds that can eliminate the deduction entirely for high earners.
Strategic planning can help you stay within favorable income thresholds or restructure operations to maximize the deduction. Techniques include splitting a business into service and non-service components, adjusting owner compensation, and timing income recognition.
Leverage Retirement Plan Contributions
Retirement plan contributions are one of the most powerful tax reduction tools available to small business owners, yet many businesses either have no plan in place or use a basic plan that does not take full advantage of available contribution limits.
In 2026, the most impactful retirement plan strategies include:
- Solo 401(k): For self-employed individuals with no employees, a solo 401(k) allows combined employee and employer contributions of up to $69,000 (or $76,500 if you are 50 or older).
- SEP-IRA: Allows employer contributions of up to 25% of compensation, maxing out at $69,000. Simple to set up and maintain.
- Defined Benefit Plan: For high-income business owners, a defined benefit (pension) plan can allow annual tax-deductible contributions of $200,000 or more, depending on age and income.
- Cash Balance Plan: A hybrid plan that combines features of defined benefit and defined contribution plans, allowing substantial deductible contributions with the predictability of a defined contribution account.
The right plan depends on your income, age, number of employees, and retirement goals. In many cases, combining multiple plans (for example, a 401(k) with a cash balance plan) yields the maximum tax benefit.
Time Your Income and Expenses Strategically
For cash-basis taxpayers (which includes most small businesses), you have significant control over when income and expenses are recognized for tax purposes. By accelerating deductions into the current year and deferring income to the following year, you can reduce your current-year tax liability substantially.
Common timing strategies include:
- Prepaying deductible expenses (rent, insurance premiums, subscription services) before year-end
- Purchasing and placing into service qualifying equipment or vehicles before December 31 to claim Section 179 or bonus depreciation
- Delaying the issuance of invoices in late December so that payment is received (and income recognized) in the following tax year
- Making retirement plan contributions or funding Health Savings Accounts (HSAs) before the filing deadline
The key is planning these decisions before year-end, not scrambling in January when the tax year has already closed.
Don’t Overlook R&D Tax Credits
The Research and Development (R&D) Tax Credit is one of the most underutilized tax incentives available to small businesses. Many business owners assume R&D credits are only for technology companies or large corporations with formal research labs. In reality, any business that develops or improves products, processes, software, or formulas may qualify.
Activities that commonly qualify for the R&D credit include developing new software features, designing custom manufacturing processes, creating proprietary formulas, testing and prototyping new products, and improving existing products or processes to enhance performance or efficiency.
For small businesses with less than $5 million in gross receipts, the R&D credit can be applied against payroll taxes (up to $500,000 per year), making it valuable even for startups and pre-revenue companies that do not yet owe income tax.
Quarterly Tax Planning: A Year-Round Approach
The most effective tax strategy is not a single annual event but a disciplined quarterly practice. We recommend the following quarterly cadence:
- Q1 (January–March): Review prior-year results, update entity structure if needed, set annual tax projections, and make Q1 estimated payment.
- Q2 (April–June): File or extend prior-year returns, review mid-year income trends, adjust estimated payments, evaluate retirement plan contributions.
- Q3 (July–September): Conduct mid-year tax projection, review potential asset purchases, assess R&D credit eligibility, plan year-end charitable giving.
- Q4 (October–December): Execute year-end strategies (income timing, expense acceleration, equipment purchases), make final retirement contributions, prepare for filing season.
“The difference between businesses that overpay on taxes and those that do not is not luck — it is planning. Every dollar saved in taxes is a dollar you can reinvest in growth.”
Let Numbers Right Optimize Your Tax Strategy
Tax planning should be proactive, strategic, and tailored to your specific business. At Numbers Right, our Tax Preparation & Strategy team works with small businesses year-round to minimize tax liability, maximize deductions and credits, and ensure full compliance. We do not just file your return — we build a tax strategy that saves you money and supports your growth.
Schedule a free tax planning consultation and discover how much you could save.
