Q&A | The Tax Strategy Hierarchy Every Small Business Owner Should Know

When it comes to tax planning, not all strategies are created equal. Think of it like building a house. You start with a strong foundation before adding the more complex features.

In tax planning, that foundation is made up of core tax strategies (simple, low-cost moves available to all business owners.) Only once these are fully in place should you move on to more advanced strategies, which are more complex and often costlier to implement.

Why It Matters

Many business owners jump to advanced tax plays without maxing out the basics, leaving easy savings on the table. The strategy hierarchy ensures you:

• Capture every deduction you’re already eligible for
  
  
• Avoid unnecessary complexity and costs before you’re ready
  
  
• Build a repeatable, compliant plan that grows with your business
  
  

Core Tax Strategies Include:

• Hiring your kids legitimately to shift income into lower tax brackets
  
  
• Taking a home office deduction
  
  
• Using the correct entity structure for your situation
  
  
• Converting after-tax spending (like travel, meals, or board meetings) into pre-tax business expenses
  
  

Advanced Tax Strategies Include:

• Asset purchases like solar, equipment, or software that come with major deductions
  
  
• Asset donations for significant charitable and tax benefits
  
  
• Oil and gas investments for upfront write-offs
  
  
• Captive insurance for insuring unique business risks while building reserves
  
  

Who Is This For? 

Core strategies apply to every business, whether you make $10K or $10M a year. Advanced strategies typically make sense for those earning $350,000+ annually, where the potential savings outweigh the setup and compliance costs.

Watch Out for Compliance

Advanced strategies require professional guidance. Some, like captive insurance or oil and gas programs, involve IRS scrutiny. Without proper documentation, you risk losing deductions and facing penalties.

Bottom Line

Max out your core strategies before moving on. This order not only maximizes savings but ensures your plan is simple, sustainable, and IRS-ready. Once the basics are fully in place, advanced strategies can be powerful tools for major tax reduction.

👉 Get our Free Tax Savings Starter Kit Built for Small Business Owners. 

Transcript

[00:00:00] If I were diving into tax planning today as a small business owner from scratch, this is the game plan I'd follow. And that's exactly what I'm unpacking today. We've got a lineup of real questions from listeners and viewers, from strategies for someone making a million dollars or more, to making sense of short-term rental deductions, to the ripple effects of the One Big Beautiful Bill.

[00:00:21] Have a question that you want answered live? Head to TaxSavingsPodcast.com. Click on podcast, scroll down, and drop your question there. Now let's dig into the incredible questions that we received from followers. Welcome to the Small Business Tax Savings Podcast, your ultimate guide to legally slashing your tax bill while building your wealth.

[00:00:41] Get ready to unlock the secrets of tax savings with your host, Mike Jess, CPA.

Establishing a Hierarchy for Small Business Tax Planning Strategies

[00:00:51] The first question we have is from a random listener, and they said, hello, love the show. I can relate to being a person that learns about strategies but never implements them. This leads to my question. I just listened to the latest episode about tax planning, and it made me curious if there is some sort of hierarchy for small business tax planning strategies.

[00:01:07] They said like with retirement savings, you start with employer match, then fill up various retirement saving buckets like an HSA, IRA, 401k, brokerage, etc. And then they also mentioned in the FI community, they talk about how you should start with addressing the big three costs—housing, food, and transportation—because those get the most bang for your buck.

[00:01:27] Does something like that exist for tax planning? And that's a great question. When I talk about tax strategies, I tend to break them into two categories: core tax strategies and advanced tax strategies.

[00:01:44] Core strategies are available to business owners of all sizes. They're relatively easy to implement, have no additional cost to implement, and are relatively easy to understand. Whether you're making $10,000 a year or $10 million a year, we can implement core tax strategies. I always say we want to fully implement all of the core strategies to the highest extent before we ever look into advanced strategies.

[00:02:00] Core strategies come first, advanced strategies come second. Core strategies are things like hiring your kids, the home office deduction, having the right entity structure, and many focus on maximizing deductions. The concept behind maximizing deductions is not going out and buying things you don't need—it’s taking spending you already do and finding a business purpose for it.

[00:02:25] That means turning after-tax spending—spending with money that's already been taxed—into pre-tax spending. This is a core concept for many strategies, whether it’s meals and travel for board meetings or something as simple as hiring your kids. As a father, I know we support our kids, but if we can have them work in the business, we can get a business deduction for those payments. That money then pays for things like basketball camps or amusement parks, converting after-tax spending into pre-tax spending.

[00:03:17] The goal is to exploit and implement core strategies as much as possible. If, after doing so, income is still in the $350,000 to $400,000 or more range, then we start to look at advanced strategies. Advanced strategies can be more complex, harder to understand, and are typically reserved for higher-income earners because they often involve an investment or legal cost.

[00:03:47] So yes, there is a hierarchy: core tax strategies first, fully implemented, then advanced tax strategies. We discuss core strategies frequently on our YouTube channel and podcast.

Overview of the Big Beautiful Bill and Its Impact on Small Business Owners

[00:04:04] The next question is from Shannon. She asked if we could do an episode on the Big Beautiful Bill and its implementations for small business owners.

[00:04:23] Yes, Shannon. We did an episode on July 9 where we broke down the main key points of the Big Beautiful Bill. Although it’s a big bill, the tax portion isn’t huge. Much of it simply extends what was already in the Tax Cuts and Jobs Act or makes those provisions permanent. We’ll continue to provide updates as more government clarification comes out. Subscribe and follow wherever you listen to stay updated.

Planning Strategies to Manage Income Phase-Outs for High Earners

[00:05:00] The next question is from an anonymous Facebook group member. If you’re not in our Facebook group, go to Facebook, type in Small Business Tax Secrets, join, and ask your questions there.

[00:05:14] This person said the Big Beautiful Bill passed with various items. They mentioned the $500,000 limit for the SALT deduction and the QBI deduction that starts to phase out. They want to take advantage of both but expect $1 million in income this year. They’ve already maxed out the mega backdoor Roth, defined benefit plan, Section 179, accelerated depreciation, and real estate professional status on their rentals. They asked what other strategies could bring AGI below the phase-out levels and avoid AMT.

[00:05:53] This is a great question. There’s a lot of planning around phase-outs because lowering income below a phase-out threshold can unlock bigger deductions and significant tax savings. At $1 million in income, getting to $500,000 or lower requires more than just core strategies.

[00:06:29] If all core strategies have been implemented, move into advanced strategies. In our advanced strategies, we look at asset purchase strategies, asset donation strategies, oil and gas investments, and captive insurance. Each of these categories has multiple options, programs, and partners.

[00:07:05] These strategies can move you from $1 million of income to $500,000 or less, getting you into phase-out ranges. We can’t cover them all in a single Q&A episode, but in our TaxElm program, we walk business owners through them daily. Fully implement core tax strategies first, then move into advanced strategies, which are typically reserved for those making $350,000 or more.

[00:07:23] Asset purchases could involve solar, equipment, or software. Other advanced options include asset donations, oil and gas, and captive insurance. The best fit depends on your situation and comfort level.

Clarifying Short-Term Rental Deductions and How They Offset Income

[00:08:00] The next question is from another anonymous Facebook group member. They said, my husband and I own a few S Corps and would like to take advantage of the short-term rental 100% deduction mentioned in the new tax bill. I understand that in order to qualify as active, not passive, and therefore count against non-passive income, we have to spend at least 500 hours working on the property and maybe a few other things. But that's the big one. My question is, can this deduction offset our business income that flows to us as individuals? From what I can tell, this will offset W-2 income and 1099 income. But is it the same for a small business owner?

[00:08:26] First, if you own multiple businesses and have multiple S Corporations, check out our training where we recommend a structure with just one S Corporation that owns your other entities. This is unrelated to your question but important for efficiency.

[00:09:02] Regarding the short-term rental 100% deduction, what you’re referring to is bonus depreciation. When looking at real estate, this doesn’t mean the full purchase price is deductible in year one. Only property with a shorter lifecycle is eligible. Roughly 30% of a building’s cost can often be deducted in year one through bonus depreciation, with the rest spread over 27.5 or 39 years depending on the type.

[00:09:55] The “500-hour rule” and “750-hour rule” apply to real estate professional status for long-term rentals. Short-term rentals—average stays of 7 days or less—don’t use those rules. Instead, they require material participation: typically 100 hours, and you must work more on the rental than anyone else.

[00:10:42] If you meet that participation requirement, losses from the short-term rental can offset W-2 income, 1099 income, and S Corp income. The deduction will usually be about 30% of the building’s value in year one, based on a cost segregation study.

Tax Advantages of Being Paid as a 1099 Contractor

[00:12:15] Next question is from Rex: are there any tax advantages to a trucker being paid as a 1099?

[00:12:38] Absolutely. As a 1099 worker, you’re considered a business owner. The government gives business owners tax advantages because they help build the economy and hire people. You can deduct business expenses to offset your income, lowering your taxable profit. Rarely would a 1099 worker have profit equal to gross income if they’re using available strategies.

[00:13:29] Tune into past podcast episodes and check out TaxElm for resources that help business owners in this exact situation understand and implement the right strategies.

Using Self-Rental Strategies and Asset Purchases to Reduce S Corp Profits

[00:14:00] Another anonymous Facebook member asked: My business has grown and I’ll likely have $2 million in profit in my S Corporation. The building my business is in is owned by my wife’s real estate LLC. Someone suggested I could use this to my advantage against taxes. They also said the S Corp can finance expensive equipment not used by my business, have a rental company make the payments, and then sell the equipment after a period. The financed equipment could then be used as a tax deduction. Does this make sense? Has anyone worked with CPA and tax attorney teams to reduce business taxes to zero?

[00:14:07] The first part is called a self-rental strategy. If the building and the business have similar ownership, you can use a §1.469-4 election and a cost segregation study to create losses in the building entity that offset business income.

[00:14:45] As for financing equipment, that can be part of advanced asset purchase strategies. These, along with asset donations, oil and gas investments, and captive insurance, are viable advanced strategies to significantly reduce income—sometimes to zero. Before using these, ensure you’ve implemented all core strategies.

Adjusting Reasonable Salary Based on Business Revenue

[00:15:53] Rex also asked: If an S Corporation owner works in the business and must pay themselves a reasonable salary, what if they reduce that salary due to decreased business revenue? Will the IRS have an issue?

[00:16:17] The IRS looks at distributions compared to salary. If they decide the salary is too low, they can reclassify distributions as salary. However, if revenue and workload have decreased, a lower salary can still be reasonable. The key is documenting why the salary is reasonable—whether that’s based on hours worked or type of work performed.

Comparing Simplified and Actual Methods for the Home Office Deduction

[00:17:00] Stacy asked: We just started an LLC this year. I’m tracking expenses, but I’m not sure if I should use the simplified or regular method for our home office. I know the simplified method is capped at $1,500. Is the regular method the same?

[00:17:10] The regular (actual) method is not capped at $1,500. It’s calculated by multiplying total home costs by the percentage of your home used for business. Typically, the actual method results in a higher deduction, but it’s worth calculating both to see which is better for your situation.

Structuring Partnerships When Owners Have Unequal Planning Opportunities

[00:18:46] Sean asked: We have two LLC owners taxed as an S Corp. We want to use many strategies discussed on the podcast, but our ownership percentages and planning opportunities are unequal. One has kids, one doesn’t, one pays more in SALT, etc. Adjusting distributions to match ownership while using these strategies would be difficult.

[00:19:42] We recommend making the main company an LLC partnership, with each owner holding their share through their own personal S Corporation. That way, each S Corp can implement its own tax strategies without affecting the other partner. This is also a good structure when multiple businesses are involved.

Accessing Remaining S Corporation Profits Without Increasing W-2 Salary

[00:20:58] Jake asked: My business profits $75,000 a year prior to paying myself, and I W-2 myself $50,000 as an employee. That leaves actual business profits of $25,000. How do I access that other $25,000? Do I have to find a creative way to make the items I want to use on it tax deferred? Are there other ways to access it without simply increasing my W-2?

[00:21:22] Assuming you’re an S Corporation, income is split into two pieces: W-2 salary (in this case $50,000) and distributions or draws. The remaining $25,000 can be taken as an owner’s draw by moving it from the business account to your personal account. This is not a business deduction—it’s a balance sheet item.

[00:21:36] Make sure your salary is reasonable. A common rough guideline is about 50% salary and 50% distributions. For example, if the business earns $100,000, take $50,000 as salary and $50,000 as distributions. Ensure all possible expenses are taken before distributions, but don’t spend on things you don’t need just to avoid taxes.

Recap of Episode Topics

[00:22:40] In this episode, we covered a wide range of topics:

• Tax strategy hierarchy (core before advanced)
  
  
• Big Beautiful Bill updates
  
  
• Planning around phase-outs for high earners
  
  
• Short-term rental deductions
  
  
• Advantages of 1099 income for truckers
  
  
• Self-rental and asset purchase strategies
  
  
• Adjusting reasonable salary
  
  
• Home office deduction methods
  
  
• Partnership structuring for unequal planning needs
  
  
• Accessing S Corporation profits
  
  

[00:23:00] Got a follow-up question? Go to TaxSavingsPodcast.com, click on “Podcast,” scroll down, and submit it—it might be featured in a future episode. If you found this helpful, subscribe, like, and share it with a business owner who’s tired of overpaying taxes.

[00:23:19] If you want help from our team of tax professionals implementing the strategies we discussed today, along with many others, visit TaxElm.com for a free discovery call. We help business owners legally lower their tax bills every single day.

[00:23:44] For more tax-saving resources, visit TaxSavingsPodcast.com, where you’ll find tools, guides, and all the information you need to reduce your taxes.

[00:24:00] The insights shared here are for educational purposes only and are not specific tax or legal advice. Always consult with a qualified professional for your unique situation.