7 Tax Mistakes to Avoid
Costing Business Owners $80K+ Per Year (And How to Fix Them)
These aren't errors. They're decisions made years ago that compound quietly — until you calculate what they've cost.
The Quick Read
You're likely making three or four of these right now. Most owners are. Each one is fixable. A composite owner with $750K of net income, addressing all seven, recovers roughly $145,000 in annual federal tax that wouldn't otherwise be owed. Most can be fixed before year-end.
- The Annual Savings, Mistake by Mistake
- 1. The Wrong Entity Structure
- 2. A Retirement Plan That Stopped Making Sense
- 3. Leaving Depreciation in Future Years
- 4. Missing the Augusta Rule and Home Office
- 5. Not Paying Family Members Through the Business
- 6. An Unoptimized QBI Deduction
- 7. A CPA and Advisor Who Don't Talk
- Composite Case Study: How Seven Gaps Compound
- Frequently Asked Questions
Every business owner I've worked with has been paying attention to their taxes. You file on time, you work with a CPA, you take the deductions you know about. What you almost certainly have not done — almost no one has — is run a proactive conversation about the strategies that never appear on a completed return. You're likely making three or four of these right now. Most business owners I've worked with were.
The seven issues below are not mistakes in the sense of errors. They are gaps — places where the absence of planning creates a tax liability that did not have to exist. Each one is fixable. If you're a $500K-to-$1M owner, the cumulative annual savings from closing all seven typically lands between $80,000 and $150,000 per year. And under the One Big Beautiful Bill Act (OBBBA), signed in July 2025, several of these levers are now permanent — meaning these are recurring savings, not one-time wins.
We'll walk through a composite — Maria, a $750K-net-income S-corp owner — at the end, showing the $145K cumulative annual recovery from addressing all seven.
The Annual Savings, Mistake by Mistake
1. The Wrong Entity Structure
Operating as a sole proprietorship or single-member LLC without an S-corp election means every dollar of net profit is subject to self-employment tax — 15.3% on the first $184,500 of net earnings in 2026 (the OASDI wage base), then 2.9% Medicare above that, plus 0.9% Additional Medicare above $250,000 MFJ. On $400,000 of net income, the SE tax bite is roughly $28,000. An S-corp election splits that net income into a reasonable W-2 salary (subject to FICA) and a distribution (not subject to SE tax), routinely cutting the payroll-tax bill by $10,000 to $20,000 a year for a $400K owner — more at higher income.
What it costs
Every year you operate as a default LLC at $400K-plus, you are writing a five-figure check to the IRS that an S-corp owner does not. Compounded over a decade, that is a six-figure decision.
How to fix it
Run the S-corp analysis. For most service businesses above $150K of net income, the election pays for itself many times over — but the salary you set must be defensible. Read the deep-dive on reasonable compensation and how to set the salary correctly.
2. A Retirement Plan That Stopped Making Sense Years Ago
The SEP-IRA is the default recommendation for self-employed high earners — and in 2026 its ceiling is $72,000, the §415(c) annual additions limit. A Solo 401(k) with profit sharing absorbs the same $72,000 but adds a $24,500 employee deferral and age-50 catch-up of $8,000 (or $11,250 at ages 60-63), pushing the total far higher. Layered with an actuarially designed cash balance defined benefit plan, owners in their 50s and 60s can shelter $200,000 to $400,000 of pre-tax income annually.
What it costs
The gap in pre-tax shelter between a maxed SEP-IRA and an optimized 401(k)-plus-cash-balance design typically runs $100,000 to $250,000 per year. At a 37% federal marginal rate plus state, that is $40,000 to $100,000 of annual tax savings left on the table — every year, for the rest of your working career.
How to fix it
Replace the SEP with a Solo 401(k) and, if your age and income support it, layer a cash balance plan. Read the deep-dive on cash balance plan design for high-income owners.
3. Leaving Depreciation in Future Years
Under OBBBA, 100% bonus depreciation has been permanently restored for qualifying property acquired and placed in service after January 19, 2025 — reversing the scheduled phase-down to 20% in 2026 and 0% in 2027. Section 179 expensing in 2026 is approximately $2.56 million with a $4.09 million phase-out threshold, both indexed annually. Together these provisions let owners deduct the full cost of qualifying equipment, vehicles over 6,000 lbs, certain interior improvements, and (under a new OBBBA category) "qualified production property" in the year of purchase rather than over five, seven, or fifteen years.
What it costs
Owners spreading depreciation when they could be expensing it are giving the Treasury an interest-free loan on a deduction they have already earned. On $200,000 of equipment, the timing difference can mean $20,000 to $40,000 of tax pulled forward into Year 1.
How to fix it
Coordinate equipment, vehicle, and tenant-improvement purchases with year-end income. Read the deep-dive on bonus depreciation and §179 strategy under OBBBA.
4. Missing the Augusta Rule and Home Office
Two legitimate deductions consistently underused. The Augusta Rule (IRC §280A(g)) allows you to rent your personal residence to your business for up to 14 days per year — the rental income is tax-free to you personally and the rent is deductible to the business at fair market rates. For an owner whose home commands a $1,500-per-day fair rental for board meetings, retreats, or training sessions, that is up to $21,000 of fully deductible rent, properly documented. The home office deduction, when the space is exclusive and regular, layers on top.
What it costs
Together, these underused deductions generate $5,000 to $20,000 in additional annual deductions for what amounts to a few hours of documentation work. At a 37% bracket, that is roughly $1,800 to $7,400 of tax saved — for nothing more than running the meetings you were already running, in the place you were already running them.
How to fix it
Document fair market rent with comparable venue quotes, draft a written rental agreement, hold real meetings, and pay through the business. Read the deep-dive on the Augusta Rule and home-office stacking.
5. Not Paying Family Members Through the Business
Hiring your spouse or your children for legitimate, documented work shifts income from your top bracket to theirs. Children under 18 employed by an unincorporated parent's business are exempt from FICA and FUTA. Wages paid to a child up to the standard deduction ($15,750 in 2026 for single filers, projected) come out federally tax-free, and any wages above that can fund a Roth IRA in their name. A spouse on payroll opens access to a family HSA, dependent-care FSA, and group benefits the business can deduct.
What it costs
The work must be real, the compensation must be reasonable, and documentation is essential — but the tax efficiency is significant and fully legal. A family of four with two minor children doing legitimate marketing and admin work routinely shifts $25,000-$50,000 of income out of the parent's bracket each year.
How to fix it
Establish actual job descriptions, run real payroll, keep timesheets, and pay defensible wages. Read the deep-dive on the integrated tax-strategy system for business owners.
6. An Unoptimized QBI Deduction
The Section 199A qualified business income deduction of up to 20% is one of the most valuable benefits available to pass-through owners — and one of the most mismanaged. Under OBBBA, §199A is now permanent (no more sunset cloud), the phase-in band has widened to $150,000 MFJ, and a new $400 minimum deduction applies to active QBI of $1,000 or more. For 2026, the phase-out begins at $403,500 of taxable income MFJ ($201,750 single) and, for SSTBs, fully phases out at $553,500 MFJ.
What it costs
An owner with $500,000 of QBI losing the deduction entirely surrenders up to $37,000 of federal tax savings — every year, now permanently. SSTB owners who have not modeled retirement-plan layering and DAF bunching against the threshold are routinely watching the deduction disappear when they could have kept it.
How to fix it
Model your taxable income against the threshold every fall, and run the SSTB-vs-non-SSTB lever set that fits your structure. Read the deep-dive on the 2026 QBI phase-out and how to preserve the deduction.
7. A CPA and Financial Advisor Who Don't Talk
This is the most expensive gap of all, because every other gap on this list lives in it. A CPA optimizing for current-year tax minimization may recommend strategies that create problems for your retirement plan, your estate plan, or a future business sale. A financial advisor who has never read your K-1 will make portfolio recommendations that ignore the QBI math, the SE-tax math, and the basis-step-up math that actually matter. Tax planning and financial planning are not separate disciplines — when treated as such, the result is a plan that is locally optimized in two places and globally suboptimal as a whole.
What it costs
The cost of the missing conversation is rarely a single number — it is the sum of every other mistake on this page that no one is responsible for catching. Owners who run their tax preparer and their financial advisor as a coordinated team typically capture $10,000-$30,000 a year that single-discipline relationships miss, plus the larger structural wins (entity, retirement, exit planning) that only show up when both sides are in the room.
How to fix it
Insist on a quarterly call with both advisors in the room, or work with a fiduciary planner who handles tax projection and investment strategy as one engagement. For owners weighing structural changes, read the deep-dive on entity choice; for owners three to five years from exit, read the deep-dive on selling your business tax-efficiently; for C-corp owners, read the QSBS §1202 guide.
Composite Case Study: How Seven Gaps Compound on One Owner
"Maria," Charlotte S-Corp Owner, Age 54
Maria runs a non-SSTB consulting and product business as an S-corp. In 2026, the business will throw off $750,000 of net income. She files jointly; her husband earns $120,000 W-2; they have two children, ages 14 and 16. She has paid herself a $60,000 salary "because it felt low enough," contributes $72,000 to a SEP-IRA, has never evaluated the Augusta Rule, has never put the kids on payroll, has never modeled QBI, and her CPA and her custodian-only investment advisor have never spoken.
Here is what a coordinated 2026 redesign captures, mistake by mistake:
1. S-corp salary correctly set to $145K (vs. $60K): +$8,000
2. SEP -> Solo 401(k) + cash balance plan: +$72,000
3. 100% bonus depreciation on $180K of equip: +$18,000
4. Augusta Rule (12 days at $1,500/day): +$6,700
5. Two children on payroll at $15K each: +$11,000
6. QBI deduction restored (taxable income mgmt): +$22,000
7. Coordinated planning (DAF timing, basis): +$8,000
---------
Estimated cumulative federal tax savings: ~$145,000
The redesign does not change what the business does, what Maria earns, or what the family spends. It changes only how the income is structured, sheltered, and reported. The work happens once, and the savings recur every year.
Illustration only. Actual results depend on entity facts, plan design, equipment timing, the SE-tax-and-QBI interaction at higher salaries, and household-specific marginal rates. Some line items overlap and reduce one another at the margin.
Frequently Asked Questions
How do I know which of these seven mistakes apply to me?
Pull your last three Form 1040s and the corresponding K-1s or Schedule Cs. If you see a Schedule SE with high SE tax, no Form 5500 (or only a SEP), no Form 8829 home-office, no children on a W-2, and a Form 8995 with zero or reduced QBI deduction, you have at least four of the seven gaps. Two or more is usually enough to justify a planning conversation before year-end.
Is bonus depreciation really 100% again in 2026?
Yes. The One Big Beautiful Bill Act, signed in July 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025, reversing the previous phase-down schedule. Treasury and IRS issued interim guidance under Notice 2026-11 confirming the rules.
What is the 2026 SEP-IRA contribution limit?
$72,000 for 2026, equal to the IRC §415(c) defined-contribution annual additions limit. The contribution cannot exceed 25% of eligible compensation (about 20% of net self-employment income for sole proprietors after the SE tax adjustment). For most owners, a Solo 401(k) plus profit sharing reaches the same $72,000 ceiling but adds the $24,500 employee deferral on top.
Is the QBI deduction still available in 2026?
Yes, and it is now permanent. The OBBBA removed the §199A sunset, widened the phase-in band to $150,000 MFJ, and added a $400 minimum deduction for active QBI of at least $1,000. The 2026 phase-out begins at $403,500 of taxable income MFJ and (for SSTBs) ends at $553,500.
Can I really put my kids on payroll?
Yes, when the work is real, the wages are reasonable for the work performed, and you keep proper documentation (job description, timesheets, W-2). Children under 18 employed by an unincorporated parent's business are exempt from FICA and FUTA. Wages within the standard deduction come out federally tax-free to the child, and any earned income can fund a Roth IRA in the child's name — one of the most powerful long-term wealth tools available to a business-owner family.
Most owners reading this list recognize three or four of the seven immediately. The cost of the gaps is not theoretical — it is a recurring annual amount you can calculate, and now, under OBBBA, it is a recurring savings you can capture every year going forward.
Most of these need fixing before December 31 to apply to the current tax year. After that, the year is forensic — you're not making decisions, you're documenting them.
If you want to know which of the seven apply to your situation specifically, and what the closing of those gaps is worth in your numbers, that is the conversation we have with our owner clients each fall.
This article is for educational purposes only and does not constitute individualized tax, legal, or investment advice. Tax law and inflation-adjusted figures are current as of the 2026 tax year (IRS Notice 2025-67 for retirement-plan limits; SSA 2026 COLA fact sheet for the wage base; OBBBA / Pub. L. 119-21 for §199A, §168(k) bonus depreciation, and §179 changes) and may change. Consult with a qualified advisor regarding your specific situation. Llewellyn Financial is a fee-only, fiduciary RIA based in Charlotte, NC.
