Small business tax deductions checklist for 2026

Published Tuesday 6 October 2026

Table of contents

• What are small business tax deductions?
• Tax deductible expenses list for small businesses
• How to handle more complex business expense deductions
• Year-end small business tax deductions checklist for 2026
• Keep good records and documentation
• Track every deductible expense with Xero
• FAQs on small business tax deductions

Key takeaways

• Ordinary and necessary business expenses lower your taxable profit, so tracking them all year means you pay only the tax you owe
• Business meals with clients and travel meals are 50% deductible in 2026, while company-wide events such as holiday parties stay 100% deductible
• Section 179 (up to $2,560,000 in 2026) and 100% bonus depreciation let you write off qualifying equipment in the year you place it in service
• Extension filers have until October 15, 2026 to file 2025 returns, and the fourth-quarter 2026 estimated payment is due January 15, 2027

What are small business tax deductions?

According to the IRS tax calendar, if you filed an extension, your 2025 individual or C corporation return is due October 15, 2026. If you’re focused on this year, you have until December 31 to make spending and timing choices that lower your 2026 tax bill.

This small business tax deductions checklist covers both. The third-quarter estimated payment was due September 15, 2026, and the next one follows on January 15, 2027, according to the IRS estimated tax guidance.

Small business tax deductions are business expenses you subtract from revenue, which lowers the profit you pay tax on. The IRS allows expenses that are ordinary and necessary, meaning common in your industry and helpful for running your business. For a landscaper, a new mower passes both tests, and a family vacation doesn’t.

Claiming your full range of deductions keeps you from paying more tax than you need to. If you’re a sole proprietor or single-member limited liability company (LLC), you’ll report most of these costs on your Schedule C tax form. The IRS business expense resources page explains each category in more detail.

Tax deductible expenses list for small businesses

Use this tax deductible expenses list to check every category your business spends on. As a rule, costs you pay for business purposes are usually deductible, and personal costs aren’t.

Many of these are ongoing overhead costs you pay every month, while others come up once or twice a year. Here are the most common categories:

• Advertising and marketing: newspaper ads, direct mailers, and the cost of setting up a website
• Bank and merchant fees: monthly account fees, card processing charges, and payment platform fees
• Business licenses and permits: state and local licenses, permits, and registration fees for your business
• Contract labor: payments to contractors and freelancers, often reported on Form 1099-NEC
• Cost of goods sold (COGS): inventory bought for resale, plus the supplies and labor used in manufacturing
• Depreciation: a portion of a capital asset’s cost each year, or up to the full cost in year one
• Education and training: courses and workshops that maintain or improve skills you use in your current business
• Employee benefits: health plans, education assistance, and other benefit programs you provide to your team
• Gifts: up to $25 per recipient each year for gifts given for business purposes
• Home office: costs of a workspace in your home used exclusively and regularly for business
• Insurance: liability, commercial property, and employee coverage, plus qualifying health and long-term care premiums if you’re self-employed
• Interest: business loan interest and mortgage interest on property used for business
• Internet and phone: communication costs your business incurs
• Legal and professional fees: payments to bookkeepers, accountants, attorneys, and similar professionals
• Meals: business meal costs, which may be 50%, 80%, or 100% deductible depending on the specifics
• Professional memberships: dues for trade associations, chambers of commerce, and professional bodies tied to your work
• Rent: payments for office, retail, or commercial space
• Repairs: fixes to commercial property, home offices, and business equipment
• Retirement plan contributions: qualifying contributions, with extra deductions and special plan types available to many small business owners
• Start-up costs: up to $5,000 deductible in your first year of operation, with the rest spread over 15 years
• Software and subscriptions: accounting software, trade magazines, and other subscriptions you use in your business
• Supplies: items you need to operate your business that aren’t part of COGS
• Taxes: employment and property taxes your business pays, excluding sales tax you collect from customers
• Travel: business trip costs, including hotels and plane tickets
• Utilities: electricity, water, and similar costs for your business space or home office
• Vehicle expenses: business driving costs, claimed through the standard mileage rate or actual expenses
• Wages: salaries, wages, and bonuses paid to W-2 employees

Accurate tracking is the first step in preparing your tax return. If you’re self-employed, the IRS Self-Employed Individuals Tax Center has more guidance on your obligations.

How to handle more complex business expense deductions

A handful of deductions come with extra rules, limits, or calculation methods. Here’s how to handle five that often need extra care.

Cost of goods sold

COGS covers inventory you buy for resale, plus manufacturing labor and supply costs. For tax years beginning in 2026, small businesses can claim COGS based on actual costs. They can also factor in inventory at the start and end of the year. Large businesses must use the inventory method.

Under IRS Revenue Procedure 2025-32, you qualify as small if average annual gross receipts for the prior three tax years don’t exceed $32 million. Here’s how the two methods compare for a business with these figures:

• Inventory at the start of the 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: beginning inventory plus costs, minus ending inventory. If it claims actual costs only, the deduction is $2.25 million.

Changing methods later requires IRS approval, so choose carefully with your accountant. This guide to inventory valuation methods explains the ways you can value your stock.

Depreciation and Section 179

When you buy a capital asset, you normally write off its cost over several years. For example, under IRS depreciation rules, commercial real estate depreciates over 39 years, so a $390,000 commercial site gives you $10,000 in depreciation each year.

Section 179 and bonus depreciation let you write off some purchases much faster. They apply to two main groups of assets:

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

Under the same revenue procedure, for tax years beginning in 2026, you can expense up to $2,560,000 under Section 179. That cap starts shrinking once your qualifying purchases for the year pass $4,090,000.

The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. Under those same IRS depreciation rules, Section 179 can only reduce your business income to zero, while bonus depreciation can create a loss. Your accountant can help you combine the two for the best result.

Home office deductions

The home office deduction can be valuable when your space meets two tests. You must use it exclusively and regularly for your business.

Exclusive use means the space is only for work. A corner of a room you use solely for business may qualify, while a spare bedroom that doubles as a guest room won’t. Daycare providers are the exception: they can claim a share based on the time the space is used for daycare.

The space also needs to be your principal place of business. Say you run a retail store with no office space. A home office you use for admin work may still qualify.

You can calculate this deduction in two ways. The simplified method multiplies your home office square footage by $5, up to a maximum of $1,500. For example, a 200-square-foot office gives you a $1,000 deduction.

The regular method lets you claim a share of your home costs based on the office’s size. If your home is 1,000 square feet and your office is 200 square feet, you can claim 20% of qualifying expenses.

Qualifying expenses include rent, utilities, renter’s or homeowner’s insurance, and repairs. If you own your home, you can also claim a share of mortgage interest, property taxes, and depreciation.

Meals

Meal deductions depend on who eats and why. Here’s how the rates work for 2026:

• Client meals, such as dinner with a customer, are 50% deductible
• Travel meals are 50% deductible, or you can claim a location-based per diem rate instead
• Company-wide events for all staff, such as a picnic or holiday party, are 100% deductible
• Meals for transportation workers subject to federal hours-of-service limits are 80% deductible when they travel away from home

From January 1, 2026, Section 274(o) makes employer-operated eating facility meals and meals for the employer’s convenience generally nondeductible, according to analysis from PwC. The IRS hasn’t issued guidance on simple breakroom snacks yet, so confirm their treatment with a tax professional.

If you travel for work, the US General Services Administration lets you look up per diem meal rates by location.

Vehicle expenses

You can deduct vehicle costs when you drive for business, such as to customers or temporary worksites. Your regular commute to your main place of business counts as a personal expense.

You can claim vehicle expenses using either:

• the standard mileage rate, which is 72.5 cents per mile for business miles driven January 1–June 30, 2026 and 76 cents per mile after that
• actual expenses, including depreciation, fuel, repairs, insurance, registration, loan interest, and lease payments

Both rates come from the IRS standard mileage rates page, so log the date of each trip to apply the right one. If you use a vehicle for both personal and business driving, track those miles separately.

For example, if you drive 6,000 personal miles and 4,000 business miles, 40% of your vehicle expenses are deductible. Starting with the mileage rate in a vehicle’s first year keeps both methods open later, while starting with actual expenses commits you to that method.

Year-end small business tax deductions checklist for 2026

The last few months of the year are when timing choices have the biggest effect on your tax bill. Work through these steps before December 31 so your 2026 return reflects every deduction available to you.

1. Compare your year-to-date spending with the list above, and look for empty categories or costs recorded in the wrong account.
2. Match your payment timing to your accounting method: cash basis businesses deduct costs in the year they pay, so a bill paid on December 30 counts for 2026.
3. Place new equipment in service, meaning set up and ready to use, by December 31, 2026 to claim Section 179 or bonus depreciation this year.
4. Use your updated profit figures to estimate your fourth-quarter 2026 tax payment, which is due January 15, 2027.
5. Bring your records up to date by matching receipts to transactions and completing your mileage log.

Accrual basis businesses follow a different rule: they deduct costs in the year they incur them, even if payment comes later. Your accountant can confirm which method you use.

Keep good records and documentation

You don’t attach receipts or invoices to your tax return, but you’ll need them if the IRS reviews it. Good records let you back up every deduction you claim. Keep:

• receipts, invoices, and other proof of each business expense
• written mileage logs with dates, destinations, and business purposes
• notes on business meals, including who attended and what you discussed
• purchase records showing when each asset was placed in service

Complete records protect you from disallowed deductions, which can raise your tax bill and add interest or penalties. The easiest way to stay ready is to track business expenses as they happen, rather than rebuilding them at tax time.

Track every deductible expense with Xero

Claiming every deduction starts with records you can trust all year. Xero brings in your transactions through automated bank feeds, and document uploads keep each receipt attached to the right expense.

JAX, Xero’s AI financial superagent, reconciles bank transactions where there’s high confidence, and you keep the final say. Your accountant can work in the same books in real time, so year-end planning takes less effort. Choose the plan that suits your business and get one month free.

FAQs on small business tax deductions

Here are answers to common questions about small business tax deductions.

Can I deduct start-up costs from before my business opened?

Yes, once your business starts operating. Costs you pay beforehand, such as market research or pre-opening advertising, count as start-up costs and are claimed from the year you open.

Are health insurance premiums deductible for self-employed people?

Yes, for any month you weren’t eligible for an employer-subsidized plan, including through a spouse’s employer. You claim them on your personal return as an adjustment that lowers your adjusted gross income, rather than as a business expense, using the Form 7206 instructions.

Can I deduct my cellphone bill?

You can deduct the share of the bill you use for business. If 25% of your cellphone use is for work, you can write off 25% of the bill.

Are business clothing and uniforms deductible?

If you’re self-employed, you can deduct clothing that’s only suitable for work, such as a chef’s uniform, while everyday wear like suits doesn’t qualify. W-2 employees can’t write off clothing costs.

Can I deduct meals when I eat alone while working?

Solo meals are deductible when you’re traveling away from home for business. At your usual workplace, inviting a client makes the meal 50% deductible.

How do I handle costs that aren’t on this tax deductible expenses list?

Apply the ordinary and necessary test: if a cost passes, it’s likely deductible even without its own category. Small one-off costs, such as parking or postage, often sit in a catch-all account, and these miscellaneous expense examples show what fits there.