5 Tax Mistakes Business Owners Make (That Cost Thousands)
Costly tax mistakes business owners make every year—and the strategies to avoid them. Stop overpaying and start building wealth.
Costly tax mistakes business owners make every year—and the strategies to avoid them. Stop overpaying and start building wealth.
5 Tax Mistakes Business Owners Make (That Cost Thousands)
You built a successful business. You're earning well. And every April, you write a check to the IRS that makes you physically ill.
Here's the frustrating part: much of that tax bill is optional.
Not illegal to avoid. Not aggressive loopholes. Just strategies your CPA probably never mentioned because they're focused on compliance, not optimization.
After working with hundreds of business owners, here are the five most costly mistakes I see—and how to fix them.
Mistake #1: Wrong Entity Structure
The problem: Operating as a sole proprietor or single-member LLC when an S-Corp election would save thousands.
How it costs you:
As a sole proprietor, all your profit is subject to self-employment tax (15.3% up to the Social Security wage base, 2.9% above).
With an S-Corp, only your "reasonable salary" is subject to payroll taxes. Profits above that pass through without self-employment tax.
Example:
Business profit: $300,000
| Structure | SE/Payroll Tax | Savings |
|---|---|---|
| Sole Prop | $32,000+ | - |
| S-Corp (150K salary) | $18,000 | $14,000/year |
Over 10 years, that's $140,000 in unnecessary taxes.
The fix: Work with a tax professional to evaluate S-Corp election. Generally makes sense when profits consistently exceed $80,000-$100,000.
Learn more about entity structure optimization →
Mistake #2: Leaving Retirement Plan Money on the Table
The problem: Using a basic SEP-IRA or SIMPLE IRA when more powerful options exist.
How it costs you:
A SEP-IRA limits you to 25% of compensation (max $69,000). Sounds great—until you realize Defined Benefit plans can allow $200,000-$350,000+ in annual deductions.
Example:
Business owner, age 55, $400,000 income
| Plan Type | Max Contribution | Tax Savings (37%) |
|---|---|---|
| SEP-IRA | $69,000 | $25,530 |
| DB + 401(k) | $280,000 | $103,600 |
| Additional savings | $78,070/year |
The fix: If you're 50+, earning $300,000+, and have stable income, explore Defined Benefit and Cash Balance plans. Yes, there are costs—but the tax savings dwarf them.
Learn more about business retirement plans →
Mistake #3: Missing the Augusta Rule
The problem: Not renting your home to your business for meetings.
How it costs you:
Section 280A allows you to rent your home to your business for up to 14 days per year—tax-free to you personally, and tax-deductible for the business.
Example:
Rent home for 14 board meetings at $1,500/day:
- Personal tax-free income: $21,000
- Business deduction: $21,000
- Tax savings (37% bracket): $7,770
Most business owners have never heard of this. It's completely legal and has been used for decades.
The fix: Document legitimate business use, get a comparable rental analysis, and implement properly with your CPA.
Mistake #4: Paying Full Freight for Healthcare
The problem: Not optimizing how healthcare is paid and deducted.
How it costs you:
Many business owners pay health insurance personally or through the business without maximizing the tax benefit.
Strategies you might be missing:
HSA Maximization: If you have a high-deductible plan, you can contribute $8,300 (family) to an HSA—triple tax advantaged. Many business owners only partially fund this.
HRA (Health Reimbursement Arrangement): S-Corp owners with W-2 wages can deduct health premiums above the line. But it must be structured correctly.
ICHRA (Individual Coverage HRA): For businesses with employees, allows tax-advantaged reimbursement for individual health insurance.
The fix: Review your healthcare structure with a tax professional who understands all available options.
Mistake #5: No Exit Tax Planning
The problem: Building business value without planning for the tax hit when you sell.
How it costs you:
When you sell your business, capital gains taxes can consume 20-35%+ of the proceeds (federal + state). On a $2 million sale, that's $400,000-$700,000 to taxes.
Strategies to reduce exit taxes:
QSBS (Qualified Small Business Stock): If structured as a C-Corp and held 5+ years, up to $10 million in gains can be excluded entirely.
Installment Sales: Spread the gain over multiple years to stay in lower brackets.
Opportunity Zones: Defer and potentially reduce gains by investing in qualified opportunity zones.
Charitable Strategies: CRTs and DAFs can defer or eliminate capital gains while supporting causes you care about.
The fix: Start exit planning 5-10 years before you intend to sell. Restructuring takes time, and some strategies have holding period requirements.
Learn more about exit planning →
The Common Thread
Notice what these mistakes have in common? They're all proactive strategies, not reactive compliance.
Your CPA ensures you file correctly. That's their job.
But tax optimization? That's a different skill set—one focused on the future, not the past.
Beyond These Five
Once you fix these basics, there's a whole universe of advanced strategies:
- Captive insurance for businesses with significant risk
- Cost segregation for real estate holdings
- Family employment strategies
- Section 7702 for tax-free accumulation beyond retirement plans
- Charitable LLCs and family foundations
Each has specific applications, but together they can reduce your lifetime tax burden by millions.
Action Steps
This Week
- Review your entity structure with a tax professional
- Calculate your current retirement plan contributions vs. maximum possible
- Research Augusta Rule applicability for your situation
This Quarter
- Model a Defined Benefit plan if you're 50+ and high-income
- Review healthcare deduction strategy
- Begin exit tax planning (even if exit is 10+ years away)
This Year
- Implement chosen strategies before year-end deadlines
- Project multi-year tax impact
- Build relationship with tax-focused financial advisor
The Bottom Line
Business owners have more tax optimization opportunities than W-2 employees—but also more ways to miss them.
Every year you overpay is a year that money isn't compounding for your future. The IRS won't send a refund because you didn't know about these strategies.
It's on you to find them. And now you know where to start.
Ready to stop overpaying?
Schedule a Business Owner Tax Review →
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