Small business tax deductions checklist: Maximize your 2025 tax savings

Published 16 December 2025

Table of contents

• What are small business tax deductions?
• Common small business tax deductions
• How to handle more complex business expense deductions
• Keep good records and documentation
• Simplify tax deductions with Xero
• FAQs on small business tax deductions

Key takeaways

• Qualifying expenses can be deducted from business revenue on your income tax return.
• Expenses must be ordinary and necessary to be deductible.
• The cost of big purchases (aka capital assets) is deducted incrementally over several years.
• Section 179 and bonus depreciation let you write off up to the full cost of qualifying capital assets in the year of purchase.
• Keep detailed records of all business expenses in case of an audit.

What are small business tax deductions?

Small business tax deductions are deductions claimed for business expenses. According to the IRS, the expenses must be "ordinary and necessary" for your business. For instance, a desk is an ordinary and necessary expense for many businesses.

If you don't claim all your deductions, you'll end up paying more tax than you need to.

That's why you should track your expenses carefully and understand the rules about IRS tax deductions for small businesses.

Check out this IRS guide to business expenses.

Common small business tax deductions

Business expense deductions vary based on your business type – but:

• if you incurred the expense for business, it's probably deductible
• if the expense was for personal use, it's not deductible.

Here are some of the most common business expense deductions.

• Advertising and marketing – such as newspaper ads, direct mailers, or setting up a website
• Contract labor – money paid to contractors or freelancers who worked for your company (often recorded on a 1099-NEC)
• Cost of goods sold (COGS) – inventory bought for resale and supplies and labor costs for manufacturing
• Depreciation – a portion of the cost of capital assets; Section 179 and bonus depreciation allow you to deduct up to the full cost in the first year of use
• Gifts – up to $25 per gift given to someone for business purposes
• Home office – costs related to maintaining an exclusive workspace in your home
• Insurance – business liability premiums, commercial property insurance, insurance for your employees, and qualifying health and long-term care insurance premiums for self-employed people
• Interest – all interest paid on loans or mortgages on property that’s used for business
• Internet and phone – communication costs incurred by your business
• Legal and professional fees – costs paid to bookkeepers, accountants, attorneys, and similar professionals
• Meals – meal expenses incurred for business purposes; may be 50%, 80%, or 100% deductible, depending on the specifics
• Rent – to rent office, retail, or commercial spaces, for instance
• Repairs – repairs you make to commercial property, home offices, business equipment, and so on
• Retirement plan contributions – qualifying retirement account contributions are deductible for all taxpayers – but small business owners may qualify for extra deductions or have access to special types of plans
• Start-up costs – costs incurred to start your business; anything over $5000 must be depreciated over time
• Subscriptions – trade magazines, software, or other subscriptions used in your business
• Supplies – supplies needed to operate your business and not included in COGS
• Travel – business travel costs, including hotels and plane tickets
• Utilities – electric, water, etc, expenses for your business space or home office
• Vehicle expenses – mileage or actual expenses as explained below
• Wages – wages and benefits paid to W-2 employees
• Taxes – like employment taxes, property taxes, etc. paid by your business – but not including sales tax your business collects

Tracking expenses correctly is the first thing you must do to prepare your taxes correctly. The IRS has more guidance on taxes for self-employed people.

How to handle more complex business expense deductions

Let's look at the rules for popular but potentially confusing deductions.

Cost of goods sold

COGS includes inventory you’ve bought for resale, and manufacturing labor and supply expenses. As of 2025, small businesses can claim COGS based on actual expenses, or they can calculate COGS based on actual expenses and inventory at the beginning and end of the year. Large businesses must consider inventory at the beginning and end of the year when calculating COGS.

To qualify as a small business, your average annual gross receipts for the past 3 years must be under $31 million.

To explain, imagine a business starts the year with $100,000 in inventory, ends the year with $500,000 in inventory, and spends $1 million on purchases, $500,000 on COGS labor, and $750,000 on supplies.

• Inventory beginning of year: $100,000
• Purchases: $1,000,000
• Cost of labor: $500,000
• Materials and supplies: $750,000
• Inventory at the end of the year: $500,000

If the business accounts for inventory, its COGS deduction is $1.85 million – the total of beginning inventory plus expenses minus ending inventory. If the business doesn't account for inventory, its deduction for actual costs is $2.25 million.

You can’t switch back and forth between these methods without IRS approval. There are also multiple ways to value inventory, as explained in this guide to COGS.

Depreciation and Section 179

When you buy a capital asset, you write off the expense slowly over time. For example, commercial real estate depreciates over 39 years – if you spend $390,000 on a commercial site , you claim $10,000 in depreciation for 39 years.

But Section 179 and bonus depreciation rules let you depreciate some capital purchases faster than usual. These are:

• real property improvements (like new roofs or HVAC systems)
• tangible personal property (such as equipment, furniture, certain vehicles, and livestock)

There are specific limits and rules on both of these deductions. For instance, you can't use Section 179 to create a business loss, but you can use bonus depreciation to generate a loss.

Ask your accountant for help and to maximize the benefits for your business.

Home office deductions

The home office deduction can be valuable, but to legitimately claim it you must use the space exclusively and regularly for work.

• Exclusive use means you can only use the space for your business. For example, a spare bedroom that you use for work but also to host guests doesn't qualify as a home office, but a corner of a room that you use only for business may qualify.

There's an exception if you’re a daycare provider: you can claim a deduction based on the proportion of time the space is used for daycare vs personal use.

• Regular use means the office is your principal place of business. If you run a business outside of your home but need a separate office for admin activities – for example, a retail business owner with no office space in their retail location – you may still be able to claim a home office deduction for it.

There are two ways to calculate this small business tax deduction:

• Simplified method:

The square footage of your qualifying home office x $5 (up to a maximum deduction of $1500).

For example, 200 square feet x $5 = $1000 deduction.

• Regular method:

Claim a portion of qualifying expenses based on the size of your home office relative to your home. For instance, if your home is 1000 square feet and your home office is 200 square feet, you can claim 20% of your qualifying home expenses.

Qualifying expenses include rent, utilities, renter's or homeowner's insurance, and repairs. If you own your home, you can claim a portion of your mortgage interest, property taxes, and depreciation based on your home's value.

Meals

Meals are deductible at various rates.

• Business meals: For example, taking a client out to dinner – are normally 50% deductible, but are 100% deductible for tax years 2025 and 2026 only.
• Travel meals: If you travel for business, meals are 50% deductible, or you can claim a location-based per diem rate. As for business meals, this deduction temporarily increases to 100% for the 2025 and 2026 tax years.
• Meals for all employees: Meals for all rank-and-file employees are 100% deductible; for example, meals at company picnics or annual holiday parties.
• Snacks for the breakroom: 50% deductible through the end of tax year 2025. After that, they won’t be deductible.
• Meals for transportation workers: 80% deductible if you travel away from home and are subject to federal limits on service hours.

The US General Services Administration has a tool to help you look up per-diem meal rates.

Vehicle expenses

Your small businesses can deduct vehicle expenses incurred for business purposes if you’re driving to your customers or to temporary worksites. You can’t claim expenses for driving to your main place of business.

There are two ways to claim vehicle expenses:

• Mileage rate: a flat rate for every mile driven for business purposes. (the rate is 70 cents per mile as of 2025)
• Actual expenses: depreciation based on the vehicle's cost, plus expenses such as fuel, repairs, insurance, registration, interest on loans, and lease payments

If you use a vehicle for personal and business purposes, track your personal and business miles separately, then write off a portion of your expenses. For instance, if you drive 6000 miles for personal reasons and 4000 miles for business purposes, 40% of your vehicle expenses are deductible.

If you claim mileage for the first year a vehicle is in use, you can switch between the two methods in future years. But if you claim actual expenses in the first year, you must use that method in future years.

Keep good records and documentation

You don't have to provide receipts or invoices when you file your tax return – but keep that info in case you get audited. Make sure to keep:

• all receipts, invoices, and other records of business expense deductions
• written mileage logs for vehicle expenses
• notes about business-related meals

If you don't have the right records, the auditor may deny the expense – which will increase your tax liability and could mean you have to pay interest or penalties.

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FAQs on small business tax deductions

Here are answers to frequently asked questions about small business tax deductions.

Can I deduct startup costs before my business officially opens?

No – although you can’t claim any business expense deductions until you start operating, you should still track all your start-up expenses. You can deduct up to $5000 in the first year of operation and depreciate any remaining start-up costs over the next 15 years.

Are health insurance premiums deductible for self-employed people?

Yes – but not if your plan is through a current or former employer. However, self-employed health insurance premiums are not deducted from your business profits like most deductible business expenses. Instead, they're subtracted from gross income to calculate your taxable income.

Can I deduct my cellphone bill?

Yes – you can deduct the portion of the bill used for business purposes. For instance, if you use your cellphone 25% for business and 75% for personal use, you can write off 25% as a business expense.

Are business clothing and uniforms deductible?

If you're self-employed or a business owner, you can write off costs for clothing that is only suitable for work. For instance, chef uniforms are deductible for self-employed chefs, but suits aren't deductible as they can be worn in many environments. If you're a W2 employee, you can't write off clothing costs.

Can I deduct meals when I eat alone while working?

Unfortunately, no – unless you're traveling for work. But if you invite a client, the meal becomes deductible.