There is a meaningful difference between tax avoidance and tax evasion. Tax evasion is illegal: hiding income, creating fraudulent deductions, misrepresenting facts to the IRS. Tax avoidance, which the tax code explicitly permits and in many cases encourages, is the legal structuring of financial decisions to minimize the tax burden within the framework the law provides. The strategies that accomplish this are not secret and are not available only to large corporations. They are available to Chicago small and mid-sized business owners who have professional guidance to apply them correctly. Our tax planning services at Odoni Partners are built around applying every legitimate strategy available to our clients’ specific situations. The IRS overview of business tax deductions and credits explains the legal framework within which business tax strategy operates.

Entity Structure: The Foundation of Tax Strategy

The entity structure through which a business operates is one of the most consequential tax decisions a business owner makes, and it is one that many business owners made without professional guidance when they first formed their business. A business operating as a sole proprietorship or single-member LLC pays self-employment tax on all net income at 15.3 percent. A business structured as an S corporation separates income into a reasonable salary, subject to employment taxes, and distributions, which are not subject to self-employment or payroll taxes. For a business generating $200,000 in net income, the difference in self-employment tax between these structures can exceed $15,000 annually. Our Chicago CPA team at Odoni Partners evaluates entity structure for every business client and identifies when restructuring would produce meaningful annual savings that justify the transition cost.

Depreciation, Section 179, and Bonus Depreciation

Business equipment and certain other assets can be expensed immediately in the year they are placed in service through Section 179 and bonus depreciation provisions rather than being depreciated over their useful life. This acceleration of deductions produces a significant tax benefit in high-income years when the full deduction against current income is most valuable. A business owner who is considering a major equipment purchase should time that purchase in consultation with their CPA: making the purchase before December 31 of a high-income year and using Section 179 or bonus depreciation can produce a deduction in the year when the business can most benefit from it.

Qualified Business Income Deduction and Retirement Plans

Pass-through business owners may qualify for the Qualified Business Income deduction under Section 199A, which can shelter up to 20 percent of qualified business income from federal income tax. The deduction has limitations and phase-outs that require careful analysis for specific businesses, but for eligible owners it represents one of the most significant tax reduction opportunities currently available. Retirement plan contributions also deserve significant attention: the contribution limits available to self-employed business owners far exceed those available to employees, and every dollar contributed reduces current-year taxable income by the same amount. Our tax planning specialists at Odoni Partners apply all of these strategies to client situations proactively. Contact our Chicago office to start this kind of strategic work for your business.