As the year winds down, it’s the perfect time to assess your financial situation and prepare for 2025. I recently had a conversation with an industry peer about strategies to shelter income, lower tax liability, and set the stage for growth in the new year. The discussion also touched on the structure of your business—whether you operate as an LLC or S Corp—and how that impacts your tax strategies.
In this newsletter, we’ll explore:
How to reduce taxable income by purchasing depreciable assets (and when it’s not a good idea).
Why company 401(k) plans might make sense for your business.
How shifting expenses and receivables can impact your year-end taxes.
The tax implications of being an S Corp or LLC and what pass-through taxation means.
Why you don’t need to worry about these strategies if your business isn’t generating significant profits yet.
And a few quick bulleted bonus strategies
Let’s break this bitch down 👇
But first, a disclaimer:
Let me make this crystal clear—I am NOT a Certified Public Accountant (CPA). For heaven’s sake, don’t take financial advice from me. Instead, go consult with your CPA. And if you don’t have one, it’s time to dig into those pockets (yes, even with those alligator arms) and pay to meet with a professional. It’s worth every penny.
Hiring for your weaknesses and playing to your strengths isn’t just good business advice—it’s sound life advice. You can’t possibly know everything about everything, especially when it comes to keeping up with the ever-changing tax codes and laws. Don’t even try. Just do your best to ask the right questions and then let the pros handle it.
Oh, and one more thing—when tax time rolls around, skip the tax factories cranking out returns assembly-line style. Go local. Hire a small business CPA. Support your community while getting the expert help you need.
But I digress—back to our normally scheduled programming 👇
1. Purchasing Depreciable Assets
One way to reduce taxable income is by investing in heavy equipment or other large assets that are nearly 100% depreciable on a federal level. But this strategy comes with important caveats.
The Upside:
Writing off the full or majority cost of an asset can significantly reduce your taxable income. This is one of the biggest advantages for lowering your adjusted gross income and paying less in taxes.
The best part?
Even if you finance the purchase, the IRS treats the asset as 100% yours, so you can deduct the entire cost—not just what you paid upfront. Just make sure the asset qualifies under Section 179 or bonus depreciation rules. Always double-check with a CPA to ensure you’re doing it right, but when done properly, this is a powerful way to keep more money in your pocket.
The Risks:
The 30-Cent Rule: Spending $1 to save $0.30 in taxes isn’t always wise.
Here’s why: Even though you’re saving on taxes, you’re still losing $0.70 for every $1 you spend. That’s money your business could use for paying off debt, or other priorities.
A tax deduction only reduces your taxable income—it doesn’t give you the money back. So if the expense isn’t truly necessary or helpful for your business, you’re better off keeping that cash in your pocket. Tax savings should be a bonus, not the reason you’re spending.
Cash Flow Crunch: If you finance these purchases and next year’s revenue doesn’t grow as planned, the monthly payments could strangle your cash flow, putting unnecessary pressure on your business.
Remember, when you finance something, you’re betting on future profits to cover the cost. If those profits don’t show up, you’ll be stuck footing the bill anyway—and that can create serious turbulence for your business. Financing can be a powerful tool, but only if you’re confident the revenue will follow.
Takeaway: Only purchase assets you genuinely need to grow your business. Otherwise, you’re trading short-term tax savings for long-term financial strain.
2. Starting a Company 401(k) Plan
Offering a 401(k) plan for your team is another option to shelter income. Here’s what you should know:
Participation Rates: Many employees opt out, either because they don’t want to reduce their paycheck or they find the process of setting it up too inconvenient.
Matching Contributions: As a business owner, you can offer a match—e.g., up to 4%, which is what we do at Grizzly Junk Pros.
Owner Contributions: As the owner, you can contribute up to $22,500 annually (or $30,000 if you’re over 50, based on 2023 limits). This can provide significant tax savings for the current year while building your retirement nest egg.
Pros:
Contributions reduce taxable income for the business, and the funds grow tax-deferred until withdrawal.
It’s a great tool to attract and retain employees, even if they never participate—it shows you’re thinking about their future.
Cons:
The funds are tied up until retirement. Early withdrawals come with penalties and tax consequences. Once you put those dollars into the 401(k) to save on taxes, consider them locked up for the long haul. Those little soldiers are gone for a long time.
Takeaway: A 401(k) plan can be a win-win for your business and your team, offering tax savings and long-term financial benefits. However, it’s a commitment, so make sure it aligns with your goals.
As always, consult with a financial advisor or CPA to ensure you’re maximizing its potential.
3. Shifting Expenses and Receivables
You can strategically adjust the timing of income and expenses to lower your taxable income for 2024:
Delay Income: Ask clients with large outstanding invoices to pay in January 2025.
Prepay Expenses: If you have the cash on hand, prepay recurring expenses like rent. For example, paying six months of rent at $2,000/month reduces your taxable income by $12,000 this year.
The implications are yuge—here’s the math: If your taxable income rate is 30% and you prepay $12,000 in expenses for 2024, you save yourself $3,600 off your tax bill.
Be Cautious: While this strategy works, it’s essential to maintain enough cash reserves to cover your operational needs.
A Few Things to Keep in Mind:
Truck Payments: Payments to your financing company don’t lower your taxable income. Why? Because they’re not expenses—they’re assets. The only part that counts as an expense is the interest.
However, the asset itself is depreciable, which already reduces your taxable income. You can’t double-dip.
Long-Term Impact: Playing this game only works for so long. Eventually, things even out, and you’ll pay for these moves—whether it’s this year, next year, or years down the road.
But honestly, I used to love doing this because a dollar saved today is worth hella more than it is tomorrow.
4. Sole Proprietorship vs. S Corp vs. LLC: Choosing the Right Business Structure
Your business structure has a direct impact on your tax obligations, liability, and overall financial strategy. If you’re operating as a sole proprietorship, it’s important to understand why that might not be the best option and how S Corps and LLCs provide better alternatives.
Why Sole Proprietorships Are Often a Bad Option
A sole proprietorship is the simplest business structure, but simplicity comes at a cost:
Unlimited Personal Liability:
There’s no legal separation between you and your business. This means your personal assets—home, savings, etc.—are at risk if your business is sued or faces debt.
Higher Tax Burden:
As a sole proprietor, all profits are subject to self-employment tax (Social Security and Medicare), which is currently 15.3%. There are no mechanisms to reduce or optimize this tax.
Lack of Credibility:
Sole proprietorships often lack the perceived legitimacy of LLCs or corporations. Clients and partners may view an LLC or S Corp as a more professional and established entity.
Takeaway: Sole proprietorships are fine for side hustles or hobby businesses, but if you’re serious about growing and protecting your business, an LLC or S Corp is a smarter choice.
S Corp and LLC: Pros and Cons
Both LLCs and S Corps offer advantages over sole proprietorships, but they work differently depending on your business needs and goals.
Pass-Through Taxation
S Corps and LLCs are both pass-through entities. This means profits and losses are reported on your personal tax return, avoiding the "double taxation" seen with traditional corporations. However, the way income is taxed within these structures differs, and that’s the key to understand.
S Corp Advantages
Lower Self-Employment Taxes:
With an S Corp, you pay yourself a reasonable salary and take the remaining profits as distributions. Unlike salary, distributions aren’t subject to self-employment tax, which can save thousands annually.
Tax Optimization for Owners:
This structure allows more flexibility for tax planning, especially if your business is highly profitable.
Credibility and Structure:
S Corps are viewed as more formal than LLCs and are often preferred by investors or lenders.
Cons:
Increased Administrative Requirements:
S Corps require more paperwork, such as annual reports, board meetings, and payroll compliance—AKA, your CPA’s monthly bill will likely be higher. However, if the savings outweigh the extra effort and expense, it’s worth moving forward.
Reasonable Salary Rule:
The IRS requires you to pay yourself a fair salary before taking distributions. If you underpay yourself to avoid taxes, it can trigger an audit.
LLC Simplicity
Easy Setup and Maintenance:
LLCs are simpler to establish and manage compared to S Corps. There’s less red tape, fewer reporting requirements, and no payroll obligations.
Flexibility in Taxation:
By default, LLCs are taxed as sole proprietorships (for single-member LLCs) or partnerships (for multi-member LLCs). However, you can elect to be taxed as an S Corp to take advantage of self-employment tax savings.
Legal Protection:
LLCs protect your personal assets from business liabilities, creating a clear separation between you and your business.
Cons:
Self-Employment Taxes:
If taxed as a default LLC (not an S Corp), all profits are subject to self-employment tax, just like a sole proprietorship.
Limited Tax Optimization:
Without electing S Corp status, an LLC doesn’t offer the same tax-saving strategies as an S Corp.
Takeaway: The right structure depends on your business size, profitability, and growth plans. Moving away from a sole proprietorship to an LLC or S Corp can provide crucial liability protection and tax savings.
Sole Proprietorship: Best for very small or side businesses with minimal risk and revenue.
LLC: Ideal for businesses that want liability protection and a simple setup but aren’t generating high profits yet.
S Corp: Best for established, profitable businesses looking to minimize taxes and take advantage of more advanced tax strategies.
If you’re unsure, consult a CPA or legal advisor to choose the structure that aligns with your goals. It’s truly one of the most important decisions you can make for your business’s future.
5. Don’t Overthink It If You’re Not Making Real Money Yet
Although these strategies can be applied to businesses of all sizes, if your business isn’t yet generating consistent, meaningful profits, don’t overthink them. Focus instead on building revenue, validating your service offerings, and maintaining solid month-to-month cash flow.
Once your business starts making real money, these tax strategies and entity structures will become much more impactful. That’s when it’s time to consult a CPA to ensure you’re maximizing your advantages.
6. Seven More Quick Tax-Saving Strategies
Hire Family Members
Pay wages to family members for actual work performed to deduct them as business expenses.
Wages to children under 18 may be exempt from Social Security, Medicare, and FUTA taxes if your business isn’t incorporated.
Use the Home Office Deduction
Deduct a portion of your rent, mortgage, utilities, and maintenance if you use part of your home exclusively for business.
For S Corps, you can’t directly take a home office deduction on your personal tax return. Instead, you can set up an Accountable Plan to reimburse yourself for home office expenses. This allows the business to deduct the expense, and you won’t report it as income.
Choose between the simplified method ($5 per square foot, up to 300 square feet) or calculate actual expenses for more accuracy.
A home office deduction can add up, especially when structured correctly for S Corps.
Deduct Vehicle Expenses
Track mileage and deduct actual expenses (gas, maintenance, etc.) or use the standard mileage rate (65.5 cents per mile for 2023).
Use Section 179 to deduct a large portion of the cost for vehicles used exclusively for business.
Utilize the Qualified Business Income (QBI) Deduction
Pass-through entities (LLC, S Corp, sole proprietorship) can deduct 20% of qualified business income, subject to income limits.
Take the Health Insurance Deduction
Self-employed? Deduct premiums for yourself, your spouse, and your dependents directly from taxable income.
Track Business Meals
Meals directly related to business are 50% deductible—just document them properly. (Some meals during 2021 and 2022 were 100% deductible due to COVID rules.)
Deduct Start-Up Costs
New businesses can deduct up to $5,000 in start-up costs and $5,000 in organizational costs in the first year.
Important: Track everything! You never know when the IRS might flag your return and come knocking. I’ve seen it happen, and it’s not pretty. Once they spot one issue—or a pattern—they’ll dig deeper than Elon’s tunnels under California.
And for more tips I can't put in writing, book a call with me 🤣.
My Closing Thoughts
Here’s what we’ve covered:
Only buy assets if they’re essential. Tax savings aren’t worth jeopardizing your cash flow.
Consider a 401(k) plan to shelter income and provide long-term benefits for you and your employees.
Shift income and expenses strategically to reduce taxable income without creating cash flow issues.
Know your entity type. Understanding the differences between Sole Proprietorships, LLCs and S Corps can save you money as your business grows.
Focus on profitability first. If your business isn’t making significant money yet, keep things simple and build your foundation.
Tax planning isn’t just about saving money right now—it’s about setting your business up for the long haul. Whether you’re tweaking your business structure, making strategic purchases, or using employee benefits to your advantage, it’s all about finding the right balance.
Take your time, make smart moves, and work with a CPA you trust to dial in your tax strategy. 🤓✌️
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Justin Hubbard
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