Small businesses are the backbone of any economy, but managing taxes can be challenging. Strategic tax planning, including taking advantage of available deductions, reducing taxable income and freeing up capital for growth.
From vehicle expenses to depreciation, home office costs, and the Qualified Business Income (QBI) deduction, understanding each deduction is essential. This guide explains key tax deductions for small businesses, recent law changes, and how to file taxes effectively.
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What Are Tax Deductions?
Tax deductions subtract eligible expenses from taxable income, reducing what the IRS can tax. To qualify, expenses must be ordinary (common in your industry) and necessary (helpful for business operations). For example, a business earning $100,000 with $25,000 in deductions only pays taxes on $75,000. Accurate documentation and tracking are essential to maximize deductions.
Vehicle And Mileage Deductions
Business vehicle use can be deducted via two methods:
- Standard Mileage Method – Deduct a fixed rate per business mile (70 cents per mile in 2025 and 72.5 cents in 2026). Maintain records of dates, mileage, and purpose of trips.
- Actual Expense Method – Deduct actual operating costs like gas, repairs, insurance, lease payments, and depreciation, based on business-use percentage.
Choosing the best method depends on mileage, vehicle costs, and usage. It’s also important to note that if you use the standard mileage rate in year one, you can switch back and forth between standard mileage and actual expenses in future years. If you use actual expenses in year one, you can’t ever switch to the standard mileage rate for that vehicle.
How Does Bonus Depreciation Work?
Depreciation recovers the cost of long-term assets like equipment, computers, or furniture over time. Bonus depreciation accelerates this by letting businesses deduct a large portion, or all, of an asset’s cost in the year it’s placed in service. Eligible property generally includes tangible assets with a useful life of 20 years or less.
The One Big Beautiful Bill reinstates 100% bonus depreciation for assets acquired and placed into service on or after January 19, 2025, allowing full immediate deductions and improved cash flow.
Section 179 Deduction
Section 179 allows businesses to deduct the full cost of qualifying equipment in the year it’s placed in service. For 2025, the deduction limit increased to $2.5 million under new legislation. This is ideal for businesses investing in machinery, vehicles, or software, accelerating tax savings instead of spreading them over multiple years.
Home Office Deduction
Many small businesses operate from home. The IRS rules for home office deduction require the space be used exclusively and regularly for business. A multi-use room like a spare bedroom used for guests or storage doesn’t qualify.
- Simplified Method – Deduct $5 per square foot, up to 300 square feet.
- Regular Method – Calculate the percentage of your home used for business and apply it to mortgage interest, utilities, and repairs.
Proper documentation and adherence to IRS rules are crucial.
Other Common Deductions
- Insurance Premiums – Liability, health, and business vehicle insurance.
- Startup Expenses – Deduct up to $5,000 in the first year; the remainder amortized over 15 years.
- Rent and Utilities – Deduct business-use proportion of office rent, phone, and internet.
- Meals and Travel – Meals with clients or while traveling are 50% deductible. However, effective January 1, 2026, meals provided for the convenience of the employer (e.g., in a company cafeteria or during overtime) are 0% deductible, a change from the prior 50%.
- Employee Compensation – Salaries, wages, bonuses, payroll taxes, and fringe benefits.
- Office Supplies and Professional Development – Deduct items and courses that maintain or improve business skills.
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Qualified Business Income (QBI)
What is qualified business income? QBI is net income from pass-through entities, including sole proprietorships, partnerships, S corporations, and some LLCs. Eligible owners may deduct up to 20% of QBI, subject to income limits and service-based business restrictions. This deduction is a powerful tax-saving opportunity for small businesses.
How To File Taxes For Small Businesses
Filing depends on business structure:
- Sole Proprietorships – Use Schedule C with Form 1040.
- Partnerships – File Form 1065 and provide Schedule K-1s.
- S Corporations – File Form 1120-S with Schedule K-1s.
- C Corporations – File Form 1120 and pay corporate income taxes.
Maintain thorough records, receipts, and expense logs. Professional help or accounting software ensures deductions are maximized and IRS-compliant.
Depreciation And Asset Planning
Combining Section 179 and bonus depreciation can accelerate tax savings. For example, a $50,000 machine could potentially be fully deducted in the year of purchase, rather than depreciating over multiple years. Proper planning ensures deductions reduce both current and future tax liability.
Tips For Maximizing Deductions
- Maintain Accurate Records – Track all expenses, including mileage and receipts.
- Separate Personal and Business Expenses – Avoid confusion and audits.
- Review Eligibility Annually – Tax laws like 100% bonus depreciation can change.
- Leverage Retirement Contributions – Contributions reduce taxable income.
- Consult a Tax Professional – Ensure full compliance and deduction optimization.
Frequently Asked Questions
What can you write off for a small business?
Ordinary and necessary expenses like equipment, vehicles, home office costs, insurance, rent, supplies, travel, meals, and employee wages.
What are the IRS rules for home office deduction?
The space must be used exclusively and regularly for business. Use the simplified method ($5 per square foot) or regular method (percentage of home expenses).
Can I combine Section 179 and bonus depreciation?
Yes. Section 179 allows an immediate deduction up to the limit, and bonus depreciation can cover remaining costs for eligible property, maximizing current-year deductions.
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