Small business tax deductions: What you can claim and how to claim it

Published Friday 5 December 2025

Table of contents

• Why tax deductions matter
• What is a tax deduction?
• How to claim tax deductions
• What business expenses can I deduct from my taxes?
• Common deductible expenses
• QBI deduction for sole proprietors
• Non-deductible expenses
• How to keep tax records
• Streamline your tax preparation with Xero
• FAQs on small business tax deductions

Key takeaways

• Maintain detailed records by opening a dedicated business bank account, saving all receipts and invoices, and using digital storage systems to photograph and organize expense documentation throughout the year.

• Claim the qualified business income (QBI) deduction to potentially deduct up to 20% of your qualified business income, which can provide significant tax savings for sole proprietors and other pass-through business owners.

• Apply the home office deduction using either the actual expense method (calculating business percentage of home expenses) or the simplified method ($5 per square foot up to $1,500 annually) if you use part of your home exclusively for business.

• Track mixed-use expenses carefully by documenting the business percentage of costs like vehicle use, phone bills, and internet service, since you can only deduct the portion used for legitimate business purposes.

Why tax deductions matter

Tax deductions for sole proprietors reduce your taxable income by allowing you to subtract legitimate business expenses from your earnings. As a sole proprietor, you own an unincorporated business where you and the business are the same legal entity for tax purposes.

This means you can deduct most business expenses to lower your tax bill. You're required to accurately track and claim these deductions on your tax return.

What is a tax deduction?

A is a legitimate business expense that reduces your taxable income dollar-for-dollar. When you claim deductions, you subtract these expenses from your gross income, which lowers the amount of tax you owe.

Most ordinary and necessary business expenses qualify as tax deductions for sole proprietors.

How to claim tax deductions

You claim business tax deductions on IRS Schedule C if you are a sole proprietor, an independent contractor, or you have not formed a corporation or partnership. Learn more in Xero’s guide to Schedule C or view the IRS Schedule C form, which includes independent contractors and anyone who hasn't formed a corporation or partnership.

Here's how the process works:

1. Complete Schedule C: Report your business income and deductions
2. Keep detailed records: Save all receipts, invoices and proof of purchase
3. File with your personal return: Attach Schedule C to your Form 1040

What business expenses can I deduct from my taxes?

Business expenses are tax deductible when they're ordinary and necessary for your trade or profession. This applies even to simple one-person businesses.

Deductible expenses include:

• Office supplies: Paper, ink, software subscriptions
• Professional services: Legal fees, accounting costs, consulting
• Equipment: Computers, printers, business furniture
• Communications: Business phone lines, internet service

Some costs are not deductible, such as purely personal expenses and most entertainment. See the “Non-deductible expenses” section below for more detail.

Common deductible expenses

You can usually deduct these common business costs:

• workplace costs such as rent or mortgage interest, utilities, maintenance and insurance
• internet and phone
• advertising and website
• office supplies
• business-related vehicle costs
• business travel
• professional memberships and publications
• interest on business loans
• business insurance

Check the IRS list of business expenses.

Workplace (including home offices)

Workplace expenses are fully deductible when you have a dedicated business location. For home offices, you have two calculation methods:

Method 1: Actual expense method

• Calculate business percentage: Divide office square footage by total home square footage
• Apply to home expenses: Multiply percentage by utilities, rent/mortgage interest, insurance, maintenance

Method 2: Simplified method

• Rate: The IRS offers a simplified standard deduction of $5 per square foot of home office space
• Maximum deduction: $1,500 per year (300 square feet maximum)

You need to use your home office exclusively for business to qualify for either method. The IRS has specific rules for home office deductions, so talk with a tax advisor to check you are using the right option.

Internet and phone

Internet and phone costs are deductible for the business portion of your usage.

For home-based businesses:

• Mobile phone: Deduct percentage used for business calls and data
• Internet service: Calculate business usage percentage of total monthly cost
• Landline phone: Only deductible if you have a dedicated business line

Business calculation: Track business usage for one month, then apply that percentage to your annual costs.

Advertising and website

Advertising is a business expense, even when you are testing digital marketing. You might run small social media or paid search campaigns to see what works, so keep good records of all these costs for tax time.

Your website is a business expense too. You can claim production costs, plus ongoing domain name and web hosting fees.

Office supplies

Stationery, printing consumables, postage and most other day-to-day office supplies are tax deductible. You can also claim for office equipment like printers, scanners, furniture and computers.

Vehicle expenses

It's common to use your personal vehicle for business activities, and you can deduct these expenses from your business income. Record the date, distance and purpose of each business journey to claim the IRS's flat rate for each mile traveled.

Or, you can calculate your total vehicle expenses for the year and claim the amount that applied to business use. To use this method, you'll need to track all of your vehicle expenses (including depreciation) in detail, as well as tracking your mileage.

Business travel

Business travel expenses are deductible when travel is primarily for business purposes.

Fully deductible travel costs:

• Transportation: Flights, train tickets, car rentals
• Accommodation: Hotel rooms and lodging
• Local transportation: Taxis, rideshares, public transit at destination

Partially deductible costs:

• Meals: 50% deductible for business travel meals (as of 2023)

Business purposes include meeting clients, attending conferences, seeking new business opportunities, or receiving job-related training.

Meals

From 2023 onward, you can claim 50% of the cost of meals purchased while you are traveling for business or meeting with a client, as the IRS limit is usually 50% of the cost of the meal. For 2021 and 2022, you can deduct the full cost of eligible business meals. Keep receipts and note how each meal relates to your business activities.

Professional memberships and publications

Professional memberships and publications are deductible when directly related to your business.

Deductible memberships:

• Trade associations: Industry-specific professional groups
• Chambers of commerce: Local business organizations
• Professional licensing bodies: Required certifications for your field

Non-deductible memberships:

• Social clubs: Country clubs, recreational facilities
• Entertainment venues: Any club primarily for hospitality

Deductible publications: Business magazines, trade journals, professional books, and industry research reports.

Interest on business loans

You can deduct the interest you pay on your business loans, but not the principal. Your loan statements should show how much interest you pay each year. This deduction also applies to interest on business expenses you paid with personal loans or credit cards.

Business insurance

You can deduct the cost of premiums on policies taken out to protect the business. This can include insurance for assets and income, or insurance against business liabilities.

QBI deduction for sole proprietors

One of the most valuable deductions for sole proprietors is the qualified business income (QBI) deduction. It allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) – plus 20% of qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income – which can lead to significant savings.

This deduction is available to owners of pass-through businesses, which includes sole proprietorships. The rules can be complex and depend on your income level and type of business, so it's a good idea to consult with a tax professional to see if you qualify and how to calculate it correctly.

Non-deductible expenses

Non-deductible expenses include personal costs and certain business penalties, even when paid through your business.

You cannot deduct these costs:

• Personal expenses: Personal meals, clothing, entertainment
• Government fines: Traffic tickets, tax penalties, regulatory fines
• Personal portions: Personal use of business vehicles or equipment

Special rules:

• Mixed-use expenses: Only deduct the business percentage with documented calculations
• Equipment over $2,500: The IRS increased the de minimis safe harbor threshold to $2,500 for taxpayers without applicable financial statements, so items over this amount may require depreciation over multiple years instead of an immediate deduction

Keep detailed records showing how you calculated the business and personal portions for mixed-use items.

How to keep tax records

Effective record-keeping requires organized systems to track all business expenses throughout the year.

Essential record-keeping steps:

1. Open a dedicated business bank account: Separate all business transactions from personal expenses
2. Save all receipts and invoices: Keep records for every business expense, regardless of amount
3. Document expenses you are unsure about: Record everything now, and later check with a tax professional whether you can deduct it
4. Use digital storage: Photograph receipts and store them in cloud-based systems
5. Add detailed notes: Include date, amount, business purpose, and attendees for each expense

Many accounting software platforms like Xero automatically capture receipt details and organize your expense records. You can also upload other documents and files to accurately capture your business data through features that extract key details automatically.

Streamline your tax preparation with Xero

Staying on top of your tax deductions doesn't have to be stressful. With the right tools, you can track expenses, organize receipts, and get a clear view of your finances all year round. This makes tax time smoother and helps you feel confident you're not missing out on valuable savings.

Xero simplifies your bookkeeping so you can focus on running your business, not your books. From capturing receipts on the go to running detailed financial reports, Xero gives you the tools to manage your deductions with ease. See how Xero can support your business and get one month free.

FAQs on small business tax deductions

Here are answers to some common questions about tax deductions for small businesses.

What is the $2,500 expense rule?

The de minimis safe harbor election allows you to immediately deduct low-cost business assets that would normally be capitalized and depreciated over time. For businesses without an applicable financial statement, you can deduct items that cost up to $2,500 per item or invoice.

What business expenses are 100% deductible?

Many ordinary and necessary business expenses are 100% deductible. This includes costs like office supplies, rent for your business premises, software subscriptions, advertising costs, and professional fees. The key is that the expense must be both common in your industry and helpful for your business.

What is the 20% tax deduction for small businesses?

This refers to the qualified business income (QBI) deduction. It allows eligible owners of pass-through businesses, including sole proprietors, to deduct up to 20% of their qualified business income. This deduction lowers your overall taxable income, reducing your tax bill.