Small Business Tax Deductions: What You Can Claim and How to Maximize Savings

Quick Summary

• Small business owners and self-employed individuals looking to lower taxable income

• Self-employed individuals and sole proprietors who want clarity around deductible expenses

• New entrepreneurs setting up bookkeeping systems

• Business owners wanting a clear explanation of the IRS $75 rule and QBI deduction

Key Takeaways

• A tax deduction reduces your taxable income, while a tax credit reduces your tax bill directly.

• Deductible expenses must be ordinary, necessary, and tied to business use.

• Proper documentation is critical. Even valid deductions can be denied without records.

• The IRS $75 rule eliminates the need for receipts under $75 (with exceptions), but business purpose must still be documented.

• The 20 percent Qualified Business Income (QBI) deduction offers major savings for eligible owners, but rules vary by income and industry.

• Many expenses are 100 percent deductible, including office supplies, software subscriptions, bank fees, business insurance, and rent for dedicated office space.

• There are 22 core deduction categories every small business should understand, from startup costs and COGS to retirement plan contributions and charitable giving.

• Vehicle expenses, home office deductions, and other mixed-use categories require careful tracking of business versus personal use.Accurate bookkeeping, categorized transactions, and digital receipts strengthen your deductions and reduce tax liability.

• Building a year-round system for tracking expenses keeps you prepared for tax season and helps you make better financial decisions.

Running a small business takes discipline and constant decision-making. Taxes add another layer of responsibility, and for many small business owners, self-employed individuals, and sole proprietors, the rules can feel overwhelming. The good news is this: you have more opportunities to reduce taxable income than you might think.

Small business tax deductions lower your business’s taxable income and reduce your tax bill, so you keep more of what you earn. The challenge is knowing what counts as deductible expenses and when each deduction applies.

Let’s break down the rules so that you can be sure you're using them to your advantage.

What Is a Tax Deduction?

A tax deduction is a business expense that the IRS allows you to subtract from your gross income, reducing the amount of income that gets taxed. Instead of lowering your tax bill directly, a deduction lowers the income that your tax is calculated on. The result is a smaller taxable income and, ultimately, less tax owed.

For an expense to qualify, it must be both ordinary and necessary for your business.

• Ordinary means the expense is common and accepted in your line of work.

• Necessary means it’s helpful and appropriate for running your business, even if it isn’t essential.

You must also be able to show that the expense is connected to business use. This is where many business owners miss out on deductions. Without documentation, even valid expenses can be disallowed.

Tracking expenses consistently throughout the tax year is one of the simplest ways to keep more of your money. You cannot claim a tax deduction without proof that the expense was ordinary, necessary, and related to business use. Businesses can use bookkeeping software and CFO services like Steady to make this process easy.

What’s the Difference Between a Tax Deduction and a Tax Credit?

To make smart decisions during the tax year, you also need to understand how deductions compare to tax credits. Both reduce what you owe, but they work in different ways and can create different outcomes.

A tax deduction lowers your taxable income. If your business earns $120,000 and you have $30,000 in deductible expenses, you’re taxed on $90,000 instead of the full amount. Because deductions reduce income rather than the tax itself, their value depends on your marginal tax rate. A $1,000 deduction might save you about $220 if you're in the 22 percent bracket.

A tax credit works differently. Credits reduce your actual tax bill, dollar for dollar. If you owe $8,000 and you receive a $1,000 credit, you now owe $7,000. The impact is immediate and far more powerful. This is why certain credits can produce substantial savings even for smaller businesses.

Common credits available to businesses include:

• Research and development credits

• Energy-efficiency incentives

• Work Opportunity Tax Credit

• Credits related to hiring or training

• Certain health insurance credits for eligible employers

Because each credit comes with documentation requirements and eligibility thresholds, many business owners either overlook them or assume they don’t qualify. With proper bookkeeping and year-round tracking, credits are easier to identify and substantiate.

What Can You Claim on Taxes as a Small Business?

Small business owners can claim a wide range of deductible expenses. These include advertising and marketing costs, health insurance premiums, business insurance, business travel, business vehicle costs, professional fees, interest paid, home office expenses, office supplies, business loan interest, independent contractors, salaries, business property costs, and hundreds of other categories.

Every small business tax deduction lowers taxable income. The more accurately you document and categorize business use, the more you can legally deduct.

The IRS $75 Rule

The IRS $75 rule says that certain business expenses under $75 do not require a receipt. This includes small travel charges, minor supplies, parking, and similar low-cost items.

This rule does not apply to lodging or some travel expenses. And the IRS still requires you to document:

• The amount

• The date

• The business purpose

• The location

• Who you met with (for business meals)

Even with the $75 rule, you cannot claim a deduction without proof that the expense supported business purposes.

The 20 Percent Qualified Business Income (QBI) Deduction

The Qualified Business Income deduction, also called the QBI deduction, allows eligible small business owners to deduct up to 20 percent of qualified business income. This applies to sole proprietors, S-corps, partnerships, and many self-employed individuals.

This deduction can be one of the biggest tax savings for small business owners. But calculating qualified business income correctly is complex.

Key rules to understand:

• Income thresholds affect whether you qualify.

• Specified Service Trades or Businesses (SSTBs), such as law, consulting, or health services, face limitations if their income exceeds the threshold.

• W-2 wage rules and business property rules apply for higher-income businesses.

With accurate bookkeeping and strategic guidance, you avoid costly mistakes and keep more of your earnings.

What Business Expenses Are 100 Percent Tax Deductible?

Some business deductions are fully deductible. Others are partially deductible. Understanding the difference matters if you want to reduce taxable income without accidentally overstating deductions.

Common 100 percent tax-deductible expenses include:

• Office supplies

• Bank fees

• Software subscriptions

• Employee salaries

• Business insurance

• Professional fees

• Advertising and marketing costs

• Many business tax payments

• Rent and utilities for dedicated office space

• Business interest on loans

Mixed-use categories such as vehicle expenses, home office expenses, and business property often require the actual expense method or a business-use percentage.

22 Top Small Business Tax Deductions

Below is a full breakdown of tax write-offs most small business owners should know.

1. Startup and Organizational Costs

1. Startup and Organizational Costs

You can deduct up to $5,000 in startup expenses and $5,000 in organizational costs during your first year. These include research, registration fees, training, and professional fees related to starting the business.

Tips:

• Track every pre-launch purchase in a separate category so you can total them easily.

• Keep invoices for formation documents, legal help, and early consulting work.

• For larger early investments, plan ahead so you know which expenses must be amortized.

2. Cost of Goods Sold (COGS)

COGS includes inventory, materials, supplies, packaging, and direct labor. Tracking COGS correctly is essential because it reduces your gross income and creates more accurate financial statements.

Tips:

• Use inventory tools or consistent spreadsheets to track beginning and ending inventory.

• Record inventory purchases separately from regular office supplies.

• For product-based businesses, update COGS monthly, so your margins stay accurate.

3. Advertising and Marketing Costs

Paid ads, printing, branding, marketing costs, and website development are fully tax-deductible. This is a category that many small business owners underuse, even though the deductions are straightforward.

Tips:

• Keep screenshots or summaries of ad campaigns to document business purpose.

• Track recurring subscriptions, such as email platforms or social media tools.

• Separate branding costs (logo design, photoshoots) so they are easy to deduct.

4. Bank Fees

Merchant fees, monthly service fees, overdraft fees, and credit card processing charges are deductible expenses.

Tips:

• Review statements for hidden or annual fees you might miss.

• Track merchant service fees by platform (Stripe, Square, PayPal) for accuracy.

• If you switch banks, download all statements before closing your old account.

5. Business Meals

Business meals are 50 percent deductible. You must document the business purpose, who attended, and the location. The IRS $75 rule sometimes applies, but notes still matter.

Tips:

• Add a note right after the meal (e.g., “Lunch with client to discuss Q2 proposal”).

• Keep digital receipts, since restaurant slips fade quickly.

• Don’t deduct meals during personal travel unless the travel itself qualifies as business.

6. Business Insurance

General liability, property insurance, cyber insurance, and business insurance premiums are deductible.

Tips:

• Save annual policy agreements for reference.

• Separate personal insurance from business insurance if you run a home-based business.

• Review policies yearly to verify coverage still matches your needs.

7. Business Vehicle Expenses

Vehicle deductions use either the standard mileage rate or the actual expense method. Deductible vehicle expenses include insurance, gas, repairs, and depreciation if business use is documented.

Tips:

• Choose one method and stick to it for the year.

• Keep a mileage log (apps make this easy and IRS-compliant).

• Avoid claiming mileage for commuting from home to your primary workplace.

8. Depreciation and Section 179

This covers business assets like equipment, computers, furniture, and machinery. Section 179 allows immediate expensing, while bonus depreciation speeds up deductions.

Tips:

• Keep purchase receipts and note when each asset was placed in service.

• Maintain an asset list that includes cost, date, and purpose.

• Consider timing purchases late in the year to increase deductions.

9. Education

Courses, certifications, subscriptions, and conferences that improve skills for your current business are deductible.

Tips:

• Keep proof that the education relates to your existing business, not a new lineup of services.

• Save detailed receipts from event registrations and travel.

• Deduct only materials required for the course, not general personal items.

10. Home Office Deduction

Self-employed business owners can deduct home office expenses using either the simplified or actual expenses method. Deductible items include rent, utilities, mortgage interest, internet, and repairs. The space must be used exclusively for business.

Tips:

• Photograph the workspace once a year to document its use.

• Keep utility and internet bills in digital folders for easy access.

• Measure your workspace accurately if using the actual expense method.

11. Interest Paid

Interest on business loans, business credit cards, and mortgage interest for an office space are deductible.

Tips:

• Track interest separately from principal repayments.

• Maintain copies of loan agreements and statements.

• Ensure credit cards used for interest deductions are used primarily for business.

12. Legal and Professional Fees

Legal and professional fees, including accountants, attorneys, tax professionals, and CFO services, are tax-deductible. This is one of the simplest deductions, yet many businesses fail to document invoices correctly.

Tips:

• Store engagement letters and invoices together in one folder.

• Categorize monthly bookkeeping or consulting subscriptions consistently.

• Only deduct fees tied to business operations, not personal matters.

13. Office Supplies and Office Space

Office supplies, software, computers, cloud tools, furniture, and utilities are deductible. Office space rent, including coworking spaces, is fully deductible.

Tips:

• Track larger equipment separately for depreciation if needed.

• Save coworking or rental agreements and monthly invoices.

• Keep supply purchases itemized to separate personal items from business items.

14. Employee Salaries and Benefits

Employee wages, payroll taxes, health insurance benefits, and retirement plan contributions are deductible.

Tips:

• Use payroll software to avoid misclassifying employees as contractors.

• Keep copies of W-2s, payroll reports, and health insurance statements.

• Document employer contributions to retirement plans.

15. Independent Contractors

Payments to independent contractors are deductible, and 1099-NEC rules apply.

Tips:

• Collect W-9s before issuing payment.

• Track all payments so you can prepare 1099s correctly.

• Keep contractor agreements organized for proof of business purpose.

16. Business Travel

Flights, hotels, transportation, baggage fees, and travel expenses for legitimate business purposes are deductible.

Tips:

• Keep itineraries and confirmations with receipts.

• Separate personal travel days from business days.

• Add notes to explain the purpose of each trip.

17. Software Subscriptions and Online Tools

Project management tools, content creation platforms, accounting software, and workflow tools are fully deductible.

Tips:

• Track annual subscriptions so renewals don’t get missed.

• Separate business subscriptions from personal plans.

• Keep receipts for initial subscription upgrades or add-ons.

18. Bad Debt

If credit sales go unpaid, some bad debt may be deductible depending on your accounting method.

Tips:

• Only deduct debt previously included in income.

• Keep documentation of attempts to collect the debt.

• Confirm eligibility if you use the cash method of accounting.

19. Taxes and Licenses

Business tax, payroll tax, sales tax, registration fees, and state fees are deductible.

Tips:

• Maintain copies of state filings and regulatory fees.

• Track payroll tax deposits separately from wages.

• Store receipts for annual business license renewals.

20. Retirement Plan Contributions

Contributions to SEP IRAs, Solo 401(k)s, and SIMPLE IRAs are deductible. This reduces self-employment income and self-employment tax for qualifying individuals.

Tips:

• Maximize late-year contributions once income is clearer.

• Store contribution receipts and plan statements.

• Confirm deadlines, since they vary by plan type.

21. Qualified Business Income

QBI allows a 20 percent deduction for many small business owners.

Tips:

• Track income carefully to avoid crossing phase-out thresholds.

• Keep records of W-2 wages and business property used in calculations.

• Review annually; eligibility can change as your business grows.

22. Charitable Contributions

Some business structures can deduct charitable contributions on the business tax return. Others deduct them on the personal tax return.

Tips:

• Save donation receipts and letters from qualifying organizations.

• Confirm whether the contribution should be deducted personally or through the business.

• For non-cash donations, document fair market value and condition.

How to Track and Document Deductible Expenses Correctly

Accurate documentation protects your deductions and supports every tax decision you make. When your records are clean, you reduce your tax liability, avoid last-minute stress, and stay prepared if the IRS ever asks for clarification. There are a couple of core habits every small business should maintain throughout the tax year.

Categorize Transactions Consistently

Every transaction needs to land in the right category. This helps you understand how money flows through your business and creates a clear picture of deductible expenses. When categories are inconsistent or incomplete, it becomes harder to support deductions, and tax filings take longer.

Consistent categorization also helps you spot trends. You can see whether certain costs are growing, whether you’re overspending in a given area, or whether you’re taking full advantage of categories like business insurance, marketing, office supplies, and business travel. Clean, organized books make tax preparation smoother and more accurate.

Store Digital Receipts and Documentation

The IRS does not require paper receipts, but you do need records. Digital receipts are easier to store and search. A photo of a receipt attached to a transaction is more reliable than a shoebox of paper and far easier to retrieve if questions arise later.

Receipts should show the date, amount, vendor, and business purpose when possible. Even small expenses under $75 benefit from clear notes. When everything is stored digitally, you avoid the risk of missing deductions simply because the documentation cannot be found.

Explain the Business Purpose Clearly

For an expense to qualify, it must support business use. A quick note is often enough: a client meeting, travel for a conference, software needed to conduct business. The IRS wants to understand why the expense matters to your operations.

Adding a brief description prevents issues months later when memories fade. It also creates a strong audit trail. If you ever need to justify business meals or travel expenses, those notes become essential.

Separate Personal and Business Accounts

Mixing personal bank accounts with business accounts is one of the fastest ways to lose deductions or raise questions during tax season. A dedicated business account makes it clear which expenses relate to the company and which do not. It also makes bookkeeping far cleaner.

Separate accounts support accurate financial reporting and stronger tax positions. When business activity stands on its own, both deductions and revenue records become easier to track and defend.

Document Business Use for Mixed-Use Items

Some expenses require proof of business usage percentage. This includes business vehicles, home office expenses, cell phones, and certain equipment. Tracking usage throughout the year prevents guesswork and keeps deductions compliant with IRS expectations.

Simple logs or recurring monthly notes go a long way. If you use the actual expense method for a business vehicle or deduct home office expenses, documentation becomes even more important. The more precise your records, the more confident you can be in your deductions.

Build a System That Updates Throughout the Year

The most effective approach is steady, year-round tracking instead of a scramble during tax season. Monthly categorization and regular reviews of receipts are simple processes for documenting business purposes that keep everything organized as you go.

Steady supports this by maintaining clean books, producing accurate financial statements, and creating a system built to withstand IRS scrutiny. You stay prepared all year, with clear data and real-time visibility into your business. That clarity makes tax season easier, but it also makes everyday decisions stronger.

Conclusion

Small business tax deductions make a big difference. When you understand what qualifies as a deductible expense, how to track business use, and how to organize your records, you lower your taxable income and save real money.

Steady works with small businesses across dozens of industries, each with unique tax rules and compliance needs. Their services help owners build clean books and use every legal deduction available.

With Steady, you can ensure your bookkeeping stays accurate, and your tax planning stays ahead of the curve, meaning your business stays compliant. With clean books and a team that understands your strategy and industry, you gain the confidence to grow your business while keeping taxes under control.

Ready to get Steady? Schedule a consultation and start building a smarter tax strategy today.