Small Business Tax Strategy Guide: LLC, S-Corp, and Deductions

Choosing the right business structure and registration state is one of the highest-leverage tax decisions a small-business owner makes. The wrong entity can cost thousands in self-employment and corporate tax; the right one, combined with aggressive-but-legal deductions, keeps more profit in the business. This guide compares LLC, S-Corp, and C-Corp, names the best states to register, and lists the deductions the IRS allows.

Business Structures

Sole Proprietorship / Single-Member LLC

• Pass-through taxation — profit flows to your personal return.
• Full self-employment tax (15.3%) on all net earnings.
• Simplest and cheapest to run; best for income under about $60,000.

S-Corporation

• Also pass-through, but you split income into salary + distributions.
• Only the salary carries payroll/SE tax; distributions do not — saving about 15.3% on the distribution portion.
• Typically saves $5,000+/year once net income passes $60,000–$80,000.
• Requires reasonable salary, payroll filings, and a Form 2553 election.

C-Corporation

• Flat 21% federal corporate rate.
• Dividends are taxed again at the shareholder level (double taxation).
• Best for raising outside capital or retaining earnings to reinvest; less common for small service businesses.

Best States to Register

• Delaware: business-friendly Court of Chancery, no sales tax, deep case law — the most popular home for corporations.
• Nevada: no corporate income tax and no franchise tax on many entities.
• Wyoming: low fees, strong privacy, no state income tax.

Note: registering in a tax-friendly state helps with state-level taxes and the legal environment, but if you operate in another state you may still owe tax there (nexus). Consult a local advisor.

Common Deductions

The IRS allows ordinary and necessary business expenses under Publication 535. Typical small-business deductions include:

• Home office (exclusive-use portion)
• Equipment, software, and supplies
• Vehicle and mileage (business use only)
• Travel and meals (50% for meals)
• Health insurance for owner/employees
• Retirement contributions (Solo 401(k), SEP, SIMPLE)
• Professional fees (accounting, legal)
• Qualified Business Income (QBI) deduction — up to 20% of qualified pass-through income under Section 199A

QBI and Section 199A

The QBI deduction can shelter up to 20% of qualified pass-through income for eligible owners, subject to income thresholds and wage/property limits. It is one of the most valuable breaks for small businesses — but the phase-out rules are intricate, so confirm eligibility with a CPA.

Summary

Choose an S-Corp once income exceeds $60K to save on self-employment tax, register in Delaware (or Nevada/Wyoming) for the best legal and state-tax environment, and capture every ordinary-and-necessary deduction including QBI. Entity and state choice are not one-time paperwork — they are ongoing tax strategy.