Small Business Tax Deductions
Most small business owners walk past deductions worth thousands without noticing. Here's the full list — from Section 179 equipment write-offs to startup costs you can deduct before you even make a sale.
Section 179 & bonus depreciation
If your business bought equipment, machinery, vehicles, computers, furniture, or off-the-shelf software this year, Section 179 lets you deduct the full purchase price right now — up to $1,250,000 for 2026. You don't have to spread it over five or seven years.
The big limitation: the deduction can't exceed your business's taxable income for the year. If your net income was $30,000 and you bought a $50,000 piece of equipment, you can only deduct $30,000 under Section 179. The remaining $20,000 carries forward. Bonus depreciation can pick up the slack in some cases with different rules.
Bonus depreciation is currently at 40% for 2026 (phasing down from 100% in 2022). It has no income limit, applies to new and used property, and covers things Section 179 doesn't — like qualified improvement property for commercial buildings.
The interplay between Section 179 and bonus depreciation gets complicated fast. See our equipment depreciation guide for a side-by-side breakdown of which to use when.
Vehicle expenses
You've got two options for deducting business vehicle use: the standard mileage rate ($0.655 per mile for 2026) or actual expenses (gas, maintenance, insurance, depreciation, lease payments). Pick whichever gives you the bigger number — but once you use the actual method on a vehicle, you can't switch to standard mileage later for that same vehicle.
The standard mileage method is simpler. Drive 15,000 business miles? That's a $10,050 deduction. Just keep a log — date, miles, and purpose. The IRS doesn't accept estimates.
Actual expenses work better if you drive an expensive vehicle or have heavy repair costs. A business owner with a $55,000 truck spending $4,200 on gas, $1,800 on insurance, and $2,300 on maintenance in a year — plus depreciation — might claim $14,000+ in vehicle deductions with the actual method versus $10,050 with standard mileage on the same 15,000 miles.
If the vehicle is used for both business and personal driving, you only deduct the business percentage. Our vehicle mileage deduction guide walks through both methods step by step.
Office rent & utilities
Rent for an office, retail space, warehouse, or co-working membership is fully deductible. Your lease payment, property insurance on the space, utilities (electricity, water, gas, trash), janitorial services, and security — all ordinary and necessary business expenses.
If you rent space in a commercial building, triple-net charges (property tax, insurance, maintenance passed through from the landlord) are deductible too. A small retail shop paying $2,800/month in base rent plus $450 in NNN charges is deducting $39,000 a year before even counting utilities.
Home-based business owners can claim the home office deduction — either the simplified $5/sq ft up to $1,500, or the regular method using the percentage of your home used for business. The dedicated office and the home office are two separate decisions, and one might make more sense than the other depending on your setup.
Employee wages & contractor payments
Every dollar you pay employees — wages, salaries, bonuses, commissions — is a deductible business expense. Employer-side payroll taxes (the 7.65% for Social Security and Medicare), unemployment taxes, and workers' comp premiums are all deductible too.
Payments to independent contractors and freelancers are fully deductible. Got a web developer who bills $5,000 for a site redesign? Deductible. A bookkeeper at $400/month? Deductible. Just make sure you issue 1099-NEC forms to any contractor you paid $600 or more during the year — without that paper trail, the IRS may disallow the deduction on audit.
Employee benefits extend your deductions further. Health insurance premiums you cover, retirement plan contributions (including matching), educational assistance (up to $5,250 per employee per year tax-free), and even dependent care assistance are all deductible business costs. A five-person company offering health coverage and a 401(k) match can easily deduct $40,000–$80,000 a year in benefits alone.
Business insurance
General liability, professional liability (E&O), commercial property, workers' compensation, cyber insurance, business interruption insurance — the premiums are all deductible. If it protects your business, it's an ordinary and necessary expense.
A small IT consulting firm might pay $2,400/year for E&O insurance and $800/year for general liability. A restaurant pays $6,000–$12,000 for comprehensive coverage including liquor liability. Every dollar of that premium is a write-off.
Don't forget disability insurance for yourself if you're a business owner. Unlike health insurance, disability premiums paid by the business aren't always deductible depending on your entity structure, so check with a tax pro on that one.
Professional services
Your accountant, your business attorney, your tax preparer, your payroll service, your business consultant — the fees you pay them are all deductible. A small business spending $3,500 on annual tax prep, $2,000 on legal review of contracts, and $1,800 on a fractional CFO is writing off $7,300 in professional services.
Merchant processing fees count too. If you run $200,000 in credit card sales at a 2.9% + $0.30 effective rate, you're paying about $5,800 in fees. Fully deductible. Same for bank account fees, loan interest, and any financial services tied to the business.
Software subscriptions for business operations — accounting software, inventory management, CRM, project management tools — fall under this umbrella or office expenses. Either way, they're deductible. A typical small business spends $200–$600/month on SaaS tools, which adds up to $2,400–$7,200 in annual deductions most owners don't think twice about.
Advertising & marketing
Google Ads, Facebook and Instagram ads, billboards, print ads, promotional products, trade show booth fees, website design and hosting, SEO services, email marketing tools — all fully deductible. The IRS is generous here: anything reasonably aimed at generating business qualifies.
A local service business spending $1,500/month on Google Local Services Ads, $400/month on a marketing agency, and $200/month on printed flyers and signage is deducting $25,200 a year in advertising. Even sponsorship of a local Little League team with your logo on the jerseys counts as advertising.
Don't overlook the small stuff: business cards, branded packaging, client appreciation gifts (capped at $25 per person per year), and the cost of maintaining a website and social media presence.
Startup costs
If you launched a business this year, Section 195 lets you deduct up to $5,000 in startup costs immediately — even if you haven't earned a dollar of revenue yet. The remaining costs get amortized over 15 years (180 months).
What counts as a startup cost? Market research, advertising before opening, employee training before launch, professional fees for incorporation or entity setup, travel to secure suppliers or customers, and office setup costs incurred before your first day of business.
The $5,000 immediate deduction phases out dollar-for-dollar once your total startup costs exceed $50,000. If your launch costs were $53,000, you can deduct $2,000 immediately ($5,000 − $3,000) and amortize the remaining $51,000. If costs hit $55,000 or more, you're into full amortization with no first-year deduction.
Inventory & COGS
For businesses that sell physical products, cost of goods sold (COGS) isn't exactly a "deduction" in the traditional sense — it's subtracted from revenue to arrive at gross profit. But it's the single largest reduction to taxable income for product-based businesses.
COGS includes raw materials, direct labor to produce goods, factory overhead, storage costs, and freight-in (shipping from your supplier to you). It doesn't include shipping to customers — that's a separate operating expense. A small e-commerce brand with $200,000 in revenue and $90,000 in COGS only pays tax on the $110,000 gross profit (minus other expenses).
Inventory tracking method matters. Most small businesses use FIFO (first-in, first-out) or specific identification. LIFO (last-in, first-out) can reduce taxable income when costs are rising, but it's more complex and requires IRS permission. Stick with what your accountant recommends.
Bad debts
If a customer doesn't pay and you've exhausted reasonable collection efforts, that unpaid invoice becomes a bad debt deduction. But there's a catch: it only works if you use accrual accounting and you already reported the income. Cash-basis businesses don't get bad debt deductions because they never recognized the income in the first place.
To claim it, you need to show you took reasonable steps to collect — sent invoices, reminders, maybe a demand letter. Writing it off in QuickBooks isn't enough on its own. Document your collection attempts.
Partially worthless debts qualify too — you don't have to prove the entire amount is uncollectible. If a client paid $3,000 of a $10,000 invoice and ghosted you, the remaining $7,000 can be written off as a bad debt in the tax year it becomes worthless.
Common questions
Can I deduct my home office as a small business owner?
Yes, as long as you have a dedicated space used exclusively and regularly for business. The same rules apply whether you're a sole prop, LLC, or S-corp. The simplified method gives you $5/sq ft up to $1,500. The regular method uses the percentage of your home dedicated to business applied to actual home expenses. If you have an S-corp, you can also use an accountable plan to have the business reimburse you for the home office — keeping the deduction clean and audit-proof.
What's the difference between a business expense and a capital expenditure?
Business expenses are deducted immediately. Capital expenditures — things with a useful life beyond one year — are typically depreciated over time. A $200 office chair is an expense. A $35,000 delivery truck is a capital asset. But Section 179 and bonus depreciation blur this line by letting you deduct capital purchases in year one instead of spreading them out. The distinction still matters for record-keeping and when your Section 179 cap is reached.
How do I prove my deductions if I get audited?
Keep receipts, invoices, bank statements, and a log for mileage and business meals. Digital records are fine — scan everything. The IRS accepts digital copies. The key is contemporaneous records: log mileage on the day you drive, not six months later from memory. For any expense over $75, you need a receipt. For meals, note who you met and what business was discussed. Good expense tracking software like our recommended tools in the business expense tracking guide makes this automatic.
Can I deduct business losses against my other income?
If you're a sole proprietor or single-member LLC, business losses typically offset other income (like a spouse's W-2 wages) on your joint return — subject to at-risk rules and passive activity limitations. S-corp and C-corp losses are generally trapped at the entity level. There's also the hobby loss rule: if your business doesn't turn a profit in three of five consecutive years, the IRS may reclassify it as a hobby and disallow losses. Keep good records to prove profit motive.