(This column originally appeared in Entrepreneur)
Key Takeaways
- Pay your employees more
- Start an Employee Stock Ownership Plan (ESOP)
- Buy equipment
- Borrow against your property instead of paying yourself
f you hate paying taxes to the U.S. government, and you run a small business, then I have a suggestion for you to help you eliminate — or at least significantly reduce — those tax payments. Actually, I have four suggestions. Of course, the usual caveats apply: circumstances may vary, check with your accountant, laws may change, etc. But try any — or all of these actions — and you’ll find yourself not only owing less to the federal government, but building a better business for yourself.
1. Pay your employees more
Why give the federal government your hard-earned money when you can give it to your employees, who are mostly responsible for your success, instead? If your business is on the accrual method of accounting (which means you match expenses and revenues regardless of whether cash was received or paid) then you have an extra advantage. Tax rules will allow you to wait until the end of the year, and then figure out how much money your company made and then pay a discretionary bonus to your employees. The “accrued” deduction can help you reduce or even eliminate your profits. Or you can contribute to your employees’ 401(k) benefit plan. You can do both within 75 days after your tax ends and still get the deduction.
You can also take advantage of deductions to reimburse your employees for education, dependent care and healthcare. Yes, in some cases, you may have to pay employer taxes, so your entire tax burden isn’t eliminated. But hopefully, you’ve already paid yourself a decent compensation during the year. So why retain the profits and pay taxes? And what’s a better way to recruit and retain talent than to share these profits with them? By choosing to pay them more, you’re not only doing your job to distribute the wealth, but you’re distributing it someplace better: directly to your people.
Related: 4 Tax Strategies Every High-Earning Entrepreneur Needs to Know for 2025
2. Start an Employee Stock Ownership Plan (ESOP)
Employee stock ownership has been increasingly popular over the past few years. That’s because America’s small business owners are getting older, and many are looking to exit their businesses. Rather than sell off their companies to private equity firms, they prefer to give their employees the chance to run them. ESOPs have many advantages.
For starters, you’re an employee, so you can participate in an ESOP. When you set one up for yourself and your employees, the ESOP entity can buy some or all of your company shares, and a bank usually finances the deal. Many studies have proven that ESOPS improve both productivity and profitability. It’s an excellent recruiting tool because people want equity in the places they work.
But, all aside, there are also major tax advantages. Your business deducts both the principal and interest when paying back the ESOP bank loan. More importantly, whatever portion the ESOP buys from your company, its share of the profits is nontaxable, as long as your company files as an S-Corporation. That’s right: nontaxable. You know all those companies that are 100% employee-owned? They’re not paying any taxes. There are other costs and concerns that need to be considered, but selling your company to your employees is a great way to completely eliminate your tax burden.
3. Buy equipment
In 2025, you can only deduct 40% of the capital expenditures — defined as equipment, furniture and fixtures, computer hardware, vehicles (subject to limits) and off-the-shelf software — in the first year you buy, with the rest being amortized over the life of the equipment. But it looks likely that tax negotiations will extend or make permanent many of the provisions of the 2017 Tax Cuts and Jobs Act, which will include restoring this deduction to 100% in the first year for purchases likely to exceed $1.25 million (that’s my prediction).
If this does happen, then you’ll be able to wipe out most, if not all, of your profits by investing in long-term assets that will add value to your business and create more opportunities, and then write off this investment in the first year. And here’s the beautiful thing: you don’t even have to use your cash to do so.
If you finance those acquisitions, you can still take the full deduction as long as the equipment is placed into service. As interest rates (hopefully) return to sub-5% levels, this strategy becomes even more appealing. So why pay taxes when you take that same money and use it to add long-term value to your business?
Related: 4 Tax Tips That Will Give Your Business an Edge and Save You Money in 2025
4. Borrow against your property instead of paying yourself
How do the one-percenters get away with paying so little taxes? They borrow against their billions. You probably don’t have that kind of cash. But if you’ve been running a business long enough, you’ve probably acquired real estate. Buildings, land and other similar assets generally make up most of a business owner’s assets. If you’ve owned the real estate long enough, you’ve probably paid off any debt. So do what the very rich do: get more debt.
Instead of taking compensation this year, borrow $200,000 against your $1 million property. Banks are fine as long as your business can pay it back (a $200,000 loan paid back over five years at 7% interest would be about a $4,000 monthly payment, surely enough that your business can afford). When you borrow, the money is nontaxable. And the interest expense for your business is deductible. Of course, you can’t do this forever — or maybe, depending on your assets, you can. And yes, if you ever want to sell your business, any outstanding liabilities will offset your purchase price. But why not let future you worry about that and instead take that money tax-free and use it for other purposes, like living a joyous life while you can.
All of the above suggestions are completely legal. All of them will eliminate — or at least significantly reduce — your federal tax liability, which will probably be your state and local taxes, too. These strategies take planning and consideration. Your cash flow and other obligations must be taken into account, which is why you should huddle with your financial advisors and work on the numbers. But if the numbers do work, then my advice is to pull the trigger. Giving money to your employees, investing in your business or just taking the money for yourself are all better options than simply handing it over to the federal government.
