A question we seem to hear more and more often is “How can I have zero tax liability?” Clients watch videos on social media or hear that their friends didn’t pay any taxes last year and wonder if they’re missing a secret tax-saving strategy. The truth is, there is not a super secret hack they’re missing.
Honestly, if your business is consistently profitable, then paying taxes is usually a sign that you’re making money, which is obviously the kind of “problem” you want to have! Keep in mind that when it comes to your income tax bill, a CPA’s goal and your goal isn’t to make your tax bill disappear. The goal is to help you legally minimize your tax burden while helping you build a healthy, profitable business.
In today’s post, I’ll share the strategies you can actually use to accomplish these worthy and attainable tax-saving and business-building goals.
Is it really possible to have zero tax liability?
Yes, sometimes this is possible, but it’s usually because one or more of these statements is true:
- Your business had little or no profit.
- You had enough tax credits to offset your tax.
- You had large deductible expenses that reduced your taxable income.
- You had losses from prior years that you carried forward.
- You qualified for certain special tax situations.
Please note these statements are not on that list:
- A secret LLC election.
- Writing off everything you buy.
- Starting a business just to create deductions.
- Buying a luxury vehicle you don’t need.
Those ideas make highly engaging social media content, but the videos and “tips” you see are usually missing a lot of the important details.
Why isn’t zero tax liability a good goal?
What I’m about to say might surprise you, but if you own a profitable business, then having some tax liability is a sign that things are going well.
For example, if your business earns $250,000 and after legitimate expenses, you’re left with $150,000 of taxable profit, it makes more sense to pay taxes on that profit than it does to spend that money buying things you don’t actually need just to avoid paying taxes.
Remember that a tax deduction rarely saves you dollar-for-dollar. Look at it like this: If you’re in the 22% tax bracket and spend $1,000 just to get a deduction, you might save around $220 in taxes, but you’re still out the other $780 you spent.
What are the best ways to legally lower your tax bill?
Instead of chasing zero taxes, you should focus on strategies that reduce your taxable income while also making financial sense. Here are the tax-saving strategies we recommend to our clients:
#1 Tax-Saving Strategy for Small Business Owners: Maximize Your Business Deductions
This is the foundation of good tax planning. Many small business owners either forget they have deductible expenses, don’t keep adequate records, or simply don’t know when an expense is deductible.
Because of this, we spend a lot of time helping clients identify legitimate business deductions that they may have overlooked. Some common examples are:
- Bookkeeping and accounting fees
- Business insurance
- Business mileage
- Education expenses
- Home office expenses
- Marketing expenses
- Office supplies
- Software subscriptions
We encourage our clients to look for and keep track of their legitimate business expenses that can qualify for tax deductions. We don’t coach clients to make purchases that aren’t ordinary or necessary for their business so that they can qualify for a deduction.
#2 Tax-Saving Strategy for Small Business Owners: Contribute More to Your Retirement
One of my favorite tax-saving strategies is helping business owners save for retirement. Contributions to plans like a Solo 401(k) or SEP IRA can reduce your taxable income while also helping your future.
Instead of sending your money to the IRS, keep it for your future self!
#3 Tax-Saving Strategy for Small Business Owners: Choose the Right Business Structure
Not every business should become an S-Corporation, but for businesses earning consistent profits, an S-Corp election can sometimes reduce the amount you’ll pay for self-employment taxes.
The caveat here is that making the election too early can actually increase costs. That’s why we always run the numbers before making this recommendation to our clients. If you’re still deciding how your business should be structured, definitely consult a CPA to help with this decision.
#4 Tax-Saving Strategy for Small Business Owners: Take Advantage of Tax Credits
Tax credits and tax deductions are not the same thing. In addition to knowing what tax deductions you can use, it’s also important to be aware of available tax credits.
One thing to keep in mind is that tax credits can be even more valuable than deductions since they lower your tax bill dollar-for-dollar. In other words, with a credit, you can subtract the credit amount from your final tax bill rather than just lowering the amount of your income that is taxed, which is what a deduction does.
Some areas in your business that could qualify you for tax credits are:
#5 Tax-Saving Strategy for Small Business Owners: Embrace Tax Planning
One of the biggest mistakes we see business owners make is waiting until tax season before trying to figure out how to reduce their tax bill. That is doing things the hard way, and many times, it’s too late.
The best tax planning happens well before December 31 when there is still time to make decisions that can greatly impact your tax return. I strongly recommend that you meet with a CPA throughout the year instead of only when it’s time to file.
Quick FAQs about Paying Zero Taxes
Let me take a minute to give you my straightforward answers to three questions I hear frequently from clients:
Should I buy business equipment just for the tax write-off?
If it’s just for the tax write-off, then no, that probably doesn’t make financial sense. A business purchase should first and foremost be something your business needs to operate or grow.
Why do I still owe taxes even though I have lots of deductions?
Deductions can erase some of your taxable income, but they don’t erase your tax liability. For example, if your business earns $120,000 and you claim $30,000 in deductions, you’ll be taxed on $90,000 instead of the full $120,000. That’s a significant tax savings, but it doesn’t mean your taxes disappear entirely. Understanding how tax brackets work can also help you understand why your tax bill may be different than you expect without ever reaching zero.
I’ve never worked with a CPA before. What questions should I ask them about lowering my taxes?
I have strong feelings about whether you should be the one coming up with all of the questions when meeting with a CPA, but it’s always smart to go into a meeting with a plan and a list of questions, so here’s what you should ask:
- Am I missing any deductions?
- Which tax credits do I qualify for?
- Should I change my business entity type?
- Would retirement contributions help lower my tax bill?
- Is my bookkeeping accurate and would it stand up to an audit?
- What else can I do before the end of the year to lower my tax bill?
- Am I paying too much in self-employment taxes?
- Do my estimated quarterly tax payments make sense?
These questions will definitely lead to more productive conversations than asking, “How can I lower my tax bill to zero?”
Abridged by Amy
The goal of tax planning isn’t to completely eliminate your tax bill. The true goal is to pay the lowest legal amount while also building long-term wealth. A profitable business will owe some taxes, and that’s okay!
I know it’s easy to get distracted by polished social media posts that seem to make sense, but please remember that legitimate CPAs don’t get and keep clients by spreading misinformation about viral internet tax hacks or gimmicks. We help educate business owners about making smart financial decisions that reduce taxes, improve cash flow, and build stronger businesses for years to come.
If you’ve been wondering how to get your tax bill as low as possible, then I encourage you to shift your question from “How can I pay zero taxes?” to “What’s the smartest way to minimize my taxes?” That’s where real tax planning begins and where an experienced CPA will truly shine.
