This post is for information only. You are responsible for reviewing and using this information appropriately. This content doesn’t contain and isn’t meant to provide legal, tax, or business advice. Requirements are updated frequently and you should make sure to do your own research and reach out to professional legal, tax, and business advisers, as needed. To sell products using the Shopify platform, you must comply with the laws of the jurisdiction of your business and your customers, the Shopify Terms of Service, the Shopify Acceptable Use Policy, and any other applicable policies.

Nobody starts a business dreaming about tax planning. But the reality is: wing it, and you run the risk of overpaying the IRS, missing out on deductions and credits, or facing surprise bills.

Smart business owners don’t stress about taxes, because they have an effective business tax planning strategy. They plan ahead, pay what they owe, and use their money saved to grow their businesses.

“Taxes are definitely one of the things that most people screw up, and it’s not really on their mind, especially if they’re not generating a huge amount of revenue,” says Viraj Patel, senior lead M&A and corporate expansion tax counsel at Shopify.

In this discussion of business tax planning, we consult two tax professionals who know how to help businesses make informed decisions throughout the tax year.

You’ll learn how to choose proactive business tax planning strategies to reduce your tax burden, maximize deductions and credits throughout the year, and determine whether you should work with a CPA.

What is business tax planning?

Business tax planning involves making informed financial decisions throughout your business’s tax year to legally minimize its taxable income and tax liability. Unlike reactive tax planning—where you simply pay taxes when they’re due—this proactive approach requires understanding how various business decisions can impact your tax obligations. 

These include:

• Your entity type

• Where you incorporate

• Where you do business

• Hiring employees

• Where you source products and materials

Choosing a tax-efficient business structure 

Your choice of business entity makes a big impact on your tax liability, self-employment tax obligations, and available tax planning strategies. So you’ll want to consider this from day one. Each business structure carries distinct tax implications that will affect both your current operations and long-term tax planning

There are two big categories of tax treatment for businesses: pass-through entities and corporations. 

Pass-through entities

Pass-through entities allow business income to flow directly (or “pass through”) to the owner’s personal tax return. This means that profits are not taxed at the corporate level. Rather, the owner or owners pay tax according to their individual income tax rates.

Various types of pass-through entities include: 

Sole proprietorships

A sole proprietor reports all business income on their personal tax return via Schedule C. Their net profit is subject to both income taxes and self-employment tax—15.3% (as of 2025 tax code) on earnings up to the Social Security wage base, with Medicare tax continuing on all earnings above that threshold.

General partnerships

A general partnership defaults to pass-through taxation, with business income allocated to partners based on their ownership stakes. Like sole proprietorships, this business income is generally subject to self-employment taxes.

Limited liability companies (LLCs)

By default, LLCs are either taxed like sole proprietorships (if they have one owner) or partnerships (if they have multiple owners). But LLCs can customize how profits are distributed to owners and/or choose to be taxed as an S corporation. 

S corporation

An S corp provides pass-through taxation without self-employment tax for owners. S corp owners must be employed by the company and take a reasonable salary subject to payroll tax, but additional distributions are not subject to self-employment tax. For example, if an S corp owner takes a $60,000 salary and receives $40,000 in additional distributions, only the $60,000 salary is subject to payroll tax (the combined 15.3% for Social Security and Medicare). This can potentially save more than $6,000 compared to a sole proprietorship—where all $100,000 in earnings would be subject to self-employment tax.

C corporations

With C corps, profits don’t pass through to the owners; rather, they’re taxed at the corporate level before they can be distributed to shareholders. Then, if the C corp distributes profits to shareholders as dividends, those distributions are taxed again on the shareholders’ personal tax returns. This creates what is known as double taxation.

The federal corporate income tax rate is 21%, regardless of the amount of income your business has. However, C corps can retain earnings within the business for future expansion, thereby avoiding any tax that would be applied to those earnings if they were distributed to shareholders. For pass-through entities like partnerships and LLCs, owners are taxed on profits regardless of whether they are distributed or kept within the business. The personal income tax rate for the owners could be higher than the corporate income tax rate.

While paying corporate income tax can be burdensome, the flip side is that C corps can more easily raise money from outside investors. They can do so by issuing shares of stock in the company and maintaining clean tax treatment for each shareholder class.

“As soon as you’re at the stage where you want outside investment, whether from venture capital or private equity, that’s when you need a corporate structure that provides adequate protection and tax benefits,” Viraj says. “If you wait too long, restructuring gets messy and expensive.”

LLCs can also elect to be taxed as C corps, allowing them to access certain corporate tax advantages. These benefits might include a lower flat corporate rate compared to some individual tax rates, or the ability to retain some earnings tax-free, so long as they’re reinvested in the business. By electing corporate tax status, you can take advantage of these benefits without forfeiting the operative flexibility of an LLC.

Simple tax planning strategies for small businesses

• Maximize deductible expenses
• Take advantage of the QBI deduction
• Utilize all available tax credits
• Contribute to a tax-deferred or tax-exempt retirement plan

The following business tax planning strategies focus on reducing your business’s taxable income through legitimate deductions, claiming valuable tax credits, and planning for your or your employees’ retirements. 

Maximize deductible expenses

Identifying and properly documenting all legitimate business expenses is one of the most straightforward methods of legally reducing taxable income. The US Internal Revenue Code allows businesses to deduct ordinary and necessary expenses incurred in operating their particular trade or business.

Deductible business expense categories to consider during tax planning include:

• Operating costs. Rent on an office or storefront, utilities, office supplies, etc.

• Professional services. Legal and accounting fees, outside marketing and advertising expenses, business insurance premiums, etc.

• Equipment purchases. Computers, machinery, office furniture, manufacturing equipment, software, etc.

• Vehicle expenses. Business mileage, gas, maintenance, insurance, depreciation, parking fees, tolls, etc.

• Home office expenses. Utilities, rent, mortgage interest, repairs, office supplies, furniture, etc.

Be sure to maintain detailed records of all your business expenses, including receipts, invoices, and documentation of business purposes.

“Clean books and records always help,” says Zoe Toward, senior lead in Shopify’s TaxOps group.

Detailed records, from receipts to workbooks, not only support deduction, the tax professional notes, but also mount a strong defense in case of an audit.

“That goes back to the clean books and records, making sure that we have support for how things are allocated, or just making sure that things are booked at the right periods,” says Zoe.

Take advantage of the QBI deduction

Pass-through entity owners should also consider the qualified business income deduction (QBI). This deduction is made after you’ve deducted all your business expenses. It allows pass-through business owners to deduct up to 20% of their qualified business income, subject to limitations based on taxable income levels and business types.

This deduction is separate from business expense categories, which are deductions from your gross income and, therefore, reduce the net income your business reports to the IRS. 

Utilize all available tax credits

Tax credits provide dollar-for-dollar reductions in tax liability. Unlike deductions that reduce your taxable income, credits directly reduce the amount of tax that you owe.

Specific tax credits commonly available to small businesses include:

• Research and development (R&D) tax credit. This tax credit rewards businesses that invest in qualifying research activities.

• Work opportunity tax credit (WOTC). Provides incentives for hiring employees from certain groups, including veterans and individuals from disadvantaged backgrounds.

• Small business health care tax credit. Available to qualifying small businesses that provide health insurance coverage to their employees.

• Employer credit for paid family and medical leave. Provides tax benefits to businesses that provide qualifying paid leave programs.

Examples of other tax credit categories are:

• Green energy tax credits. These tax credits include benefits for solar installations, electric vehicle purchases, and other qualifying clean energy investments.

• Education and training tax credits. Businesses that provide employee training programs or continuing education opportunities may qualify for tax credits.

• Historic landmark preservation tax credits. Preserving government-certified historic buildings or other structures may qualify businesses for these types of tax credits.

Consult with a qualified tax adviser who can help you systematically review all available federal income tax credits, determine which ones apply to your business, and ensure proper compliance with claiming requirements. 

Contribute to a tax-deferred or tax-exempt retirement plan

Small business owners have access to several tax-advantaged retirement plan options, each with distinct contribution limits and operational requirements.

Such plans include:

401(k) or solo 401(k)

401(k) plans allow businesses to offer retirement benefits to their employees. Both employees and employers can contribute to the plans. If your business doesn’t have employees, a solo 401(k), also known as the individual 401(k), allows the owner to contribute as both employee and employer. For 2025, solo 401(k)-eligible participants can contribute up to $70,000 annually ($77,500 with additional catch-up contributions for those aged 50 and older).

SEP IRA

The Simplified Employee Pension (SEP) IRA allows contributions up to 25% of compensation, or $70,000, whichever is less. These plans work well for businesses with only a few employees, as contribution percentages must be equal for all eligible participants.

SIMPLE IRA

The Savings Incentive Match Plan for Employees IRA, or SIMPLE IRA, allows small businesses with 100 or fewer employees to offer retirement benefits with minimal administrative complexity. Employees can contribute up to $16,500 in 2025 ($20,000 with catch-up contributions for those 50 and older), while employers must either match employee contributions up to 3% of compensation or make a 2% non-elective contribution for all eligible employees.

Understanding state vs. federal business taxes

State tax obligations vary across jurisdictions and can substantially impact your small business’s overall tax liability. As a business owner, you need to understand tax laws in your state as well as the states where you conduct business to ensure proper compliance and optimal tax planning. 

State corporate taxes

State corporate income tax rates range from 0% in states like Texas and Florida to more than 10% (as of 2025 tax code) in states like California and New York. Some states also impose franchise taxes or gross receipts taxes regardless of a business’s profitability. Meanwhile, others offer various tax incentives for qualifying business activities—for example, hiring veterans or investing in certain industries.

State pass-through taxes

Pass-through entity taxes have become increasingly common at the state level. Many states now allow certain pass-through entities to pay state income taxes at the business level rather than having all income flow through to owners’ personal returns. There are tax benefits to voluntarily opting into double-taxation. When businesses make this election, they can deduct these state tax payments as business expenses on their federal tax return, potentially reducing their overall taxes owing. 

State sales tax

Sales tax obligations depend on where you sell your products or perform services. Recent US Supreme Court rulings had made it easier for states to require out-of-state businesses to collect and remit sales tax, even without a physical presence in that state.

According to tax laws, payroll tax obligations apply in states where employees work, regardless of where your business is based—an important consideration with remote workers.

Three additional state tax planning opportunities may include:

• Choosing a tax-favorable business location

• Timing business income recognition across tax years

• Utilizing state-specific credits and incentives (for certain research activities, job creation, or investments in designated local economic development zones)

Federal tax considerations

Federal tax policy changes can have downstream effects on your business operations and pricing. For example, if your business imports materials or goods from international suppliers, you may face federal import taxes, or tariffs.

Businesses may choose to include these costs in product pricing, or pass them on to customers. Small businesses need to be flexible and have flexible systems to help them adapt to federal tax policy changes.

Working with a CPA for business tax planning

A certified public accountant (CPA) specializing in business taxation can offer expertise in current tax code, detailed business tax planning strategies, and knowledge of compliance requirements.

Viraj recommends meeting with a tax adviser even before you start your business.

“It’s a lot easier to create something than to have to move and restructure something to get it to where you want,” he says.

A qualified tax professional like a CPA can identify tax planning opportunities specific to your industry and business circumstances. They can also help you navigate complex regulations like the corporate alternative minimum tax, and ensure proper implementation of ongoing tax strategies. This tax adviser can also provide guidance on your estimated tax payments, helping you avoid underpayment penalties while optimizing your cash flow.

A tax adviser stays up to date with tax law changes. They can help evaluate the tax consequences of your major business decisions, coordinate their tax planning with your overall business strategy, and help you maintain compliance with evolving tax obligations.

Viraj and Zoe both recommend that businesses earning more than $1 million in annual revenue meet with a tax professional four times per year to talk business tax planning strategies, although fewer instances may be possible. “For lower-end revenue,” Viraj says, “say, less than $500,000, you could generally get away with one or two times a year at a bare minimum.”

You might also consider meeting with your tax adviser to discuss the implications of big hiring decisions, ownership or partnership changes, or new tax legislation.