Most small businesses claim fewer deductions than they are entitled to, and a smaller number claim things they cannot support. Both problems come from the same place: not knowing what the test actually is.
The test does not change between categories. The cost was incurred for the business, it is ordinary and necessary for the kind of business you run, and you can show it. A genuine cost with no evidence is as vulnerable as a personal cost claimed in error.
This covers the deductions that matter most to a small business, what each one requires, and the ones that sit close enough to personal spending to attract attention.
Why Tax Deductions Matter for Small Businesses
A tax deduction reduces your taxable income, not your tax dollar-for-dollar, but at your marginal rate. A $10,000 deduction for a business owner in the 24% bracket saves $2,400 in federal income tax (plus SE tax savings if the deduction reduces net profit). Maximizing legitimate deductions is one of the most effective ways to reduce your tax bill legally.
The test is the same for every item on the list: it was incurred for the business, it is ordinary and necessary for the kind of business you run, and you can show it. A genuine cost with no evidence behind it is as vulnerable as a personal cost claimed in error.
Anu Gupta, CA, EA, B.Tech · LinkedIn1. Home Office Deduction
| Method | How It Works |
|---|---|
| Simplified | $5 per square foot, maximum 300 sq ft = up to $1,500/year. No depreciation recapture. |
| Actual Expense | Deduct the percentage of home costs (rent/mortgage interest, utilities, insurance, repairs) equal to the office's share of total home square footage. Larger deduction but more complex. |
The space must be used regularly and exclusively for business. A desk in the corner of a bedroom does not qualify.
2. Vehicle Expenses
| Method | How It Works |
|---|---|
| Standard Mileage | IRS rate per business mile driven. Simplest method; must elect in year 1. |
| Actual Expenses | Deduct gas, insurance, registration, depreciation, repairs proportional to business use percentage. |
Commuting (home to regular office) is never deductible. Keep a mileage log with date, destination, and business purpose.
3. Startup Costs
- First-year expensing: up to $5,000 in startup costs in the year you open for business.
- The remaining costs are amortized over 180 months (15 years).
- The $5,000 allowance phases out dollar-for-dollar when total startup costs exceed $50,000.
- Organizational costs (forming a corporation or partnership) follow the same $5,000/$50,000 rule.
4. QBI Deduction (Section 199A)
Pass-through business owners (sole proprietors, partners, S-corp shareholders) may deduct up to 20% of qualified business income. See the dedicated QBI deduction post for full details.
5. Self-Employed Health Insurance Premium
If you are self-employed and not eligible for employer-sponsored coverage through a spouse, you can deduct 100% of health, dental, and vision insurance premiums for yourself, your spouse, and your dependents. This is an above-the-line deduction on Schedule 1, it reduces your income tax but not self-employment tax.
6. Self-Employment Tax Deduction (Half of SE Tax)
Self-employed individuals pay 15.3% SE tax on net earnings. You can deduct 50% of the SE tax you pay as an above-the-line deduction, reducing your income tax (though not the SE tax itself).
7. Retirement Contributions
| Plan Type | 2025 Limit |
|---|---|
| SEP-IRA | 25% of net SE income, up to $69,000 |
| Solo 401(k) Employee Deferral | $23,500 ($31,000 if age 50+) |
| Solo 401(k) Employer Contribution | 25% of compensation, total combined limit $69,000 |
| SIMPLE IRA | $16,500 ($20,000 if age 50+) |
8. Section 179 and Bonus Depreciation
- Section 179: immediately expense up to $1,220,000 (2024 limit) of qualifying equipment/software placed in service during the year.
- Bonus Depreciation: 40% in 2025 on qualifying property (phases down from 100%).
- Both allow you to deduct the full cost of equipment in year 1 rather than depreciating over several years.
9. Business Travel
- Flights, hotels, rental cars: 100% deductible if trip is primarily for business.
- Meals while traveling: 50% deductible.
- Convention attendance qualifies (domestic; foreign conventions require extra scrutiny).
- Personal side trips are not deductible, prorate if trip is mixed business/personal.
10. Professional Fees
- CPA and bookkeeping fees for business returns and records
- Attorney fees for business legal matters
- Business consulting fees
- Financial advisor fees for business (not personal investment) advice
11. Software and Subscriptions
- QuickBooks, Xero, FreshBooks and other accounting software
- Project management tools (Asana, Monday, etc.)
- Cloud storage (Google Workspace, Dropbox Business)
- Industry-specific software
- Professional journal subscriptions
Annual subscriptions are deducted in the year paid (cash-basis taxpayers). Multi-year prepaid subscriptions may need to be prorated.
12. Marketing and Advertising
- Website design and hosting
- Google Ads and social media advertising
- Business cards, brochures, signage
- Promotional items with business name
- PR and agency retainers
13. Business Meals
50% of the cost of meals directly connected to active business conduct (discussing business with a client, interviewing a potential employee). The 100% restaurant deduction that existed in 2021-2022 has expired, back to 50% for 2025+.
Pro Tip: Keep digital notes of who you met and what was discussed immediately after every meal, the IRS requires documentation of the business purpose.
14. Education and Training
Courses, books, and seminars that maintain or improve skills required in your current business. Note: education costs to qualify for a new career are NOT deductible.
15. Business Insurance
- General liability insurance
- Professional liability / E&O insurance
- Workers compensation
- Business property insurance
- Key-person life insurance (not deductible if business is the beneficiary)
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Frequently Asked Questions
Can I deduct my cell phone as a small business expense?
Yes, proportional to business use. If you use your phone 70% for business, deduct 70% of the bill. A dedicated business phone is 100% deductible.
Are bank fees deductible?
Yes. Business checking account fees, wire transfer fees, and merchant processing fees are ordinary business expenses.
Can I deduct clothing?
Only if the clothing is a uniform or protective gear required for work and not suitable for everyday wear. A suit worn to client meetings is not deductible.
What is the general test for whether something is deductible?
That it was incurred for the business and is both ordinary and necessary for the kind of business you run, and that you can show it. Those three elements matter equally: a genuine business cost with no evidence behind it is as vulnerable as a personal cost claimed in error. Where an item has both business and personal use, only the business share is claimed, and the split needs a basis you can explain.
What gets claimed most often and disallowed most often?
The costs that sit close to personal spending: vehicles, meals, travel with a personal element, home costs, and clothing. None of them is inherently disallowed and all of them attract attention, because the distinction turns on facts rather than on categories. The protection is the same in every case: record the business purpose at the time, keep the evidence, and apportion honestly where there is mixed use.
Written by
Anu Gupta, CA, EA, B.Tech
Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn
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