Tax planning for a small business is not complicated in theory. Spend less than you earn, track your deductions, pay what you owe on time. Simple enough. But the gap between that advice and what actually happens on a business owner's tax return? That's where things get interesting — and expensive, if you're not paying attention.

We work with business owners across San Diego County, from solo consultants in Carlsbad to multi-employee operations down in Chula Vista. The mistakes we see aren't usually dramatic. They're quiet. An entity structure that made sense five years ago and hasn't been revisited. Estimated payments that are close but not quite right. A retirement plan contribution that could have been larger. These are the things that add up to thousands of dollars over time.

Here are five areas where we see the biggest opportunities — and the biggest oversights.

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1. Your Entity Structure Is the Foundation — and It's Not Free in California

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A lot of business owners file as sole proprietors or single-member LLCs because that's what was easiest when they started out. That's fine when revenue is modest. But once your net self-employment income crosses roughly $80,000 to $100,000, the self-employment tax hit — 15.3% on top of your income tax — starts to sting. An S-Corporation election lets you split your business income between a reasonable salary (which is subject to payroll taxes) and distributions (which are not). The savings can be real.

But here's what most articles skip: the S-Corp election is not free in California. The state imposes a 1.5% tax on S-Corporation net income, with a minimum of $800 per year. That $800 franchise tax applies to LLCs and corporations alike — it's due every year your entity exists, regardless of whether you earned a dime. And if you set your salary too low to juice the tax savings, you're inviting an IRS reclassification of your distributions as wages. That's not a gray area. The IRS looks at it, and they're not shy about adjusting it.

So yes, the S-Corp can save money. But you need to run the numbers with California's franchise tax and the 1.5% entity-level tax factored in. For some business owners — especially those with net income under $60,000 or so — the math doesn't actually work out in favor of the election. We model this for clients every year because the answer can change as income changes.

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2. Deductions — You're Probably Missing More Than You Think

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The obvious ones — office supplies, software, professional development, business mileage — those tend to get captured. Where things slip through is in the less obvious categories.

Did you use part of your home exclusively for business? The simplified home office deduction is $5 per square foot, up to 300 square feet. That's a maximum of $1,500. Not life-changing, but not nothing either. The regular method, which calculates actual expenses based on the percentage of your home used for business, can yield a larger deduction depending on your mortgage interest, property taxes, and utilities. It requires more record-keeping, but for San Diego homeowners with high housing costs, it's often worth the effort.

One thing we'd flag for business owners here: the deduction for health insurance premiums. If you're self-employed and not eligible for coverage through a spouse's employer, your premiums for yourself and your family may be deductible as an adjustment to income — not an itemized deduction. That distinction matters. It reduces your adjusted gross income, which affects your eligibility for other deductions and credits downstream.

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3. Timing Income and Expenses — But Know Your Accounting Method First

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Timing income and expenses strategically sounds like advanced planning. It's not. It's one of the most practical levers you have.

The basic idea: if you expect to be in a higher bracket next year, pull deductible expenses into this year. If you expect lower income ahead, defer deductions to a year when they'll offset more. Straightforward.

But here's the catch that rarely gets mentioned. This strategy depends on your accounting method. If you're on the cash method — which most small businesses and sole proprietors are — you have flexibility. You recognize income when you receive it and expenses when you pay them. That means you can time a large equipment purchase or prepay certain expenses to shift your deduction into the current year.

If you're on the accrual method, the rules are different. Income is recognized when earned, expenses when incurred. You can't just delay sending an invoice and call it deferred income. The method you're on determines what moves are available to you, and getting this wrong can create problems if the IRS takes a closer look. Know your method. Plan within it.

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4. Estimated Tax Payments — and the Safe Harbor Rules Most People Miss

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Quarterly estimated tax payments. Nobody's favorite topic. But underpaying them is one of the most common and most avoidable penalties we see.

If you expect to owe $1,000 or more in federal tax for the year after subtracting withholding, the IRS generally requires quarterly estimated payments. The four due dates in 2026 are April 15, June 15, September 15, and January 15 of the following year. Miss them or underpay, and you'll owe a penalty calculated on the shortfall for each period.

Here's what matters and what most generic advice leaves out: the safe harbor rules. You can avoid the underpayment penalty entirely if your total estimated payments and withholding equal at least 100% of your prior year's tax liability. If your adjusted gross income exceeded $150,000 in the prior year (or $75,000 if married filing separately), that threshold jumps to 110%. Alternatively, paying at least 90% of the current year's liability also satisfies the requirement.

In practice, the prior-year safe harbor is the easier target because you know the number. You filed the return. It's right there. We generally recommend clients start with that figure and adjust upward if the current year is clearly going to be significantly higher.

California has its own estimated tax requirements through the Franchise Tax Board, with slightly different rules. The state doesn't offer the same 110% prior-year safe harbor — California uses 100% of prior year or 90% of current year across the board. And the FTB penalty calculation can bite harder than you'd expect. We set up both federal and state estimates for clients at the same time to make sure both bases are covered.

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5. Retirement Plans — The Numbers Are Different Than You Think

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Tax-advantaged retirement plans are one of the few areas of the tax code where the government is genuinely trying to help you. Take advantage of it.

For self-employed business owners, the three main options are the SEP-IRA, the SIMPLE IRA, and the Solo 401(k). They're not interchangeable, and the right choice depends on your income, whether you have employees, and how much you want to contribute.

A SEP-IRA allows employer contributions of up to 25% of compensation. But for self-employed individuals, the effective limit is approximately 20% of net self-employment income after the deduction for half of self-employment tax. That distinction trips people up. The 25% number you see quoted everywhere is based on W-2 compensation, not Schedule C net profit. For a sole proprietor netting $150,000, the actual maximum SEP contribution is closer to $27,500 — not $37,500. Still substantial, but the math is different than most people expect.

The Solo 401(k) is worth a closer look if you have no employees other than a spouse. It has two components: an employee elective deferral of up to $23,500 (with a $7,500 catch-up if you're 50 or older), plus an employer contribution of up to 25% of compensation. That dual structure often allows a higher total contribution than a SEP at the same income level, especially for owners with net income in the $75,000 to $200,000 range.

Every dollar you contribute to these plans reduces your taxable income for the year. If you haven't set up a plan yet, most can be established and funded before your tax filing deadline — though the Solo 401(k) must be established by December 31 of the tax year, even if contributions can come later. Don't wait until April to think about this.

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The Bottom Line

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None of these strategies require exotic planning or aggressive positions. They're available to every small business owner in California. The difference between using them and not usually comes down to whether someone is paying attention to the details throughout the year, or scrambling to catch up in March.

If any of this sounds like it applies to your situation — or if you're not sure whether it does — that's exactly the kind of conversation we have with clients. San Diego Tax Associates is here when you're ready.

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