Owing the IRS more than you expected at tax time usually means you left legal deductions on the table. There are a handful of small business tax loopholes—legal provisions in the tax code—that entrepreneurs use every year to lower their income tax and keep more of what they earn.
Keep reading for eight popular and widely-used tax loopholes that entrepreneurs and small business owners use every tax year to reduce their income tax or maximize their tax deductions.
Disclaimer: This article has been reviewed by a Certified Public Accountant (CPA). However, we always recommend working with your own tax professional or CPA when filing your business taxes. That's the best way to stay out of trouble with the IRS—while legally saving on taxes where you can.
What is a small business tax loophole?
Tax loopholes are legal ways that tax laws and tax codes are used to reduce your tax burden. These laws' shortcomings or provisions can help cut the amount you owe on your small business tax bill and/or reduce your tax liability.
Keep in mind that remaining compliant and law-abiding with your taxes is the most important thing when looking for tax loopholes. When in doubt, talk to a tax professional or your accountant.
Looking for more tax advice? Read our favorite CPA-approved small business tax tips here.
What tax loopholes can an LLC use?
An LLC doesn't have its own federal tax classification—the IRS taxes it based on how it elects to be treated. By default, a single-member LLC is a disregarded entity (taxed like a sole proprietor on Schedule C) and a multi-member LLC is taxed as a partnership. An LLC can also elect to be taxed as an S corporation or C corporation. So the "loopholes" available to your LLC are really the strategies tied to whichever tax treatment you choose.
For most small LLCs, four levers move the needle most:
Elect S-corp status to split your pay into a reasonable salary and distributions, so only the salary portion owes the 15.3% self-employment tax (loophole #2).
Claim the 20% qualified business income (QBI) deduction, which the 2025 tax law made a permanent part of the code (loophole #4).
Shelter income in a retirement account like a SEP-IRA or solo 401(k) (loophole #3).
Deduct equipment purchases with Section 179 and 100% bonus depreciation (loophole #5).
Talk to your accountant before electing S-corp or C-corp treatment—the added paperwork and payroll requirements only pay off above a certain income level.
Tax loophole #1: Write off your personal expenses
Did you know that some of your personal expenses actually count as business expenses? These small business write-offs can save you hundreds to thousands in taxes a year if you play your cards right.
One type of personal expense that can be a business write-off is your rent, in the form of a home office deduction. This deduction is for those who regularly use part of their home or property as their primary place of business or for business purposes, including both renters and homeowners, and including home types such as traditional homes, condominiums, and apartments.
Another expense that can be deducted is business travel expenses. If you take a trip where most of your time is spent on business activities, your flights, hotel stay, and even meals are considered business tax deductions.
Remember that the tax deductions for travel expenses must be ordinary and necessary and can't be for primarily personal purposes. You can read more about personal taxes versus business taxes here.
Your phone, internet bill, and other technology like laptops and computers can be tax deductible too if you need them for business purposes. Again, they must be ordinary and necessary and used for your business.
What can't you deduct?
Unfortunately, gym fees are generally never deductible for tax purposes. Capital gains may have to do with your taxes, but muscle gains don't.
In addition, business bank account fees are deductible if you have a business checking or savings account—but not for your personal bank account.
The good news? With Relay (that's us!), business checking comes with no monthly maintenance fees and no minimum balances. Relay's banking platform is built for small business owners, freelancers, and entrepreneurs alike.
Tax loophole #2: Elect as an S corp
An S-corporation (S-corp) is a company that passes corporate income, losses, deductions, and credits to its shareholders for tax purposes. There are several requirements for becoming an S-corp, and it's different than being a sole proprietor or limited liability company (LLC). Make sure to do your research and talk to your accountant before you file to become an S-corp.
The S-corp business structure comes with several tax benefits. Qualifying S-corps don't pay federal taxes at the corporate level, and shareholders of the company can be employees of the business and draw salaries as employees. You pay the 15.3% self-employment tax only on your reasonable salary, not on the distributions you take on top of it—which is where the savings come from. The IRS requires that salary to be reasonable for the work you do, so don't lowball it.
Tax loophole #3: Shelter income in retirement accounts
Tax shelters are legal ways to reduce your taxable income and tax liabilities. Tax shelter groups include retirement accounts and investment accounts—so if you haven't had motivation to save for retirement, this small business tax loophole could provide it.
A traditional 401k or Individual Retirement Account (IRA) has funds that aren't taxable until the owner of the account retires. That means money that would have normally been taxed by the IRS will instead accrue earnings and interest until the funds are drawn.
Additionally, a Roth IRA or Roth 401k is a good option for individuals expecting a higher income. The money that goes into these accounts is taxed at the time of contribution, but not when the funds are withdrawn.
For 2026, a self-employed owner can defer up to $24,500 in a solo 401(k) (plus a 25%-of-compensation employer contribution), and contribute up to $7,500 to a traditional or Roth IRA, per the IRS retirement plan limits.
Tax loophole #4: Claiming the QBI deduction
The Qualified Business Income (QBI) deduction is a deduction that allows eligible owners to deduct up to 20% of their QBI, plus certain real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income.
Your QBI is made up of qualified items of income, gain, deduction, and loss from a business or trade, and is inclusive of S-corps, partnerships, and sole proprietorships. The 2025 tax law (the One Big Beautiful Bill Act) made the QBI deduction permanent—it had been scheduled to expire at the end of 2025. For more information on the QBI deduction, read the relevant IRS article on QBI deductions or speak to a tax professional.
Tax loophole #5: Business vehicle deductions
Your car's costs can be deducted from your taxes if you use it for business purposes, even if it's also partially used for personal purposes. These costs include gas, oil, repairs, tires, insurance, fees, licenses, and depreciation.
However, it's important to note that proper bookkeeping is incredibly important for this kind of deduction. The law requires that you substantiate your expenses with adequate records to qualify—that means keeping your receipts organized.
Luckily, Relay has your back. With Relay's receipt management feature, you can keep track of all your expenses in one place. We'll send you automatic reminders to upload your receipts after you pay for something with a Relay debit card (like gas) and automatically link your receipts to the matching transaction.
Normally, you have to account for depreciation when deducting your business vehicle. But the "G-Wagon Tax Write-off"—also known as the Section 179 Tax Write-Off—lets you deduct the full business purchase price of qualifying assets in the year they were purchased, rather than depreciating them over time. For 2026, the 2025 tax law also restored 100% first-year bonus depreciation on qualifying business property.
Tax loophole #6: Business meal deductions
If you're paying for business meals without using the deductions, it's time to get some money back. If you as the business owner or an employee of the business are present during the food and drinks being provided, and the meals are from legitimate restaurants, they are 50% deductible.
Make sure that your expenses are 100% related to your business. This includes dinners at hotels during conferences, restaurants during overnight business travel, and year-end parties for employees.
Tax loophole #7: Deduct medical expenses via a medical reimbursement plan
Medical reimbursement plans, or MERPs, are employer-sponsored benefit plans that help to cover employee medical expenses. Not only are MERPs customizable for the employer, but they also provide tax benefits to both employees and employers.
Employees can contribute to MERPs tax-free, and MERP payments made by employers are deductible. This means that in addition to providing for your employees' health, you're also getting a tax break.
It's important to note that MERPs are only viable for C-corporations (C-corps). If your LLC is taxed as a C-corp, you'll also qualify. To become a C-corp, you must pay some fees, file articles of incorporation, offer stock to shareholders, obtain an employer identification number (EIN), and establish a board of directors. This isn't the right tax strategy for every business, but it's worth investigating if you think it might make sense for your company.
Tax loophole #8: Hire family members to save on payroll taxes
Some small business owners have considered hiring family members to save on payroll taxes. However, this tax loophole only works if you're hiring children. The goal isn't necessarily to save on payroll taxes, but rather to create earned income to contribute to a retirement account or IRA.
If the family member you're hiring is, in fact, a minor (under 18) working in a parent-owned sole proprietorship or partnership, their wages are exempt from Social Security and Medicare taxes, but not likely from State Unemployment Insurance.
Bonus tip: Take advantage of small business tax credits
Tax credits are another way to save money during tax season. They differ from tax deductions; instead of lowering your taxable income, they are directly subtracted from the amount of money that taxpayers owe.
There are dozens of business tax credits available, so talk to your tax professional or accountant to determine which ones you may qualify for when tax season comes.
The bottom line on small business tax loopholes
The best tip we have for small business owners who want to use tax loopholes? Talk to a professional.
CPAs and other money pros know how to help you leverage these small business tax loopholes. While this article covered many of the most-used ways to get tax benefits, every business is different—to make sure you take advantage of every tax savings opportunity available, it's always wise to discuss your unique situation with an expert.
Stay on the money with Relay
If you're looking for other ways to save money as a small business, have you considered Relay?
Relay's online banking platform is designed for small business owners. You can open 20 individual checking accounts, 2 savings accounts, and issue 50 virtual or physical debit cards. You'll love the flexibility and freedom that come with our features designed for entrepreneurs like you. Open a Relay account to get started.
Frequently asked questions
Are tax loopholes legal?
Yes. A tax loophole is a legal provision in the tax code that lets you reduce what you owe—it's not tax evasion, which is illegal. The strategies in this article are all sanctioned by the IRS, but the rules are specific, so document everything and work with a tax professional.
What is the biggest tax loophole for a small business?
For many owners, electing S-corporation status is the highest-impact move, because it can exempt a portion of your profit from the 15.3% self-employment tax. The 20% QBI deduction is a close second, since it applies to most pass-through businesses.
Can an LLC write off a car?
Yes, if the vehicle is used for business. You can deduct actual costs (gas, repairs, insurance, depreciation) or use the standard mileage rate, and Section 179 lets you deduct the full business-use cost of a qualifying vehicle in the year you buy it. Keep mileage logs and receipts to substantiate the deduction.
Can I hire my kids to lower my taxes?
In a sole proprietorship or a partnership owned only by the child's parents, wages paid to your child under 18 are exempt from Social Security and Medicare taxes, and your child can earn up to the standard deduction ($16,100 in 2026) before owing federal income tax—while your business deducts the wages. The work has to be real and the pay reasonable.
