19 Small Business Tax Deductions for 2026

A small business tax deduction is a business expense the IRS lets you subtract from your income before your tax is calculated. To qualify, the cost has to be ordinary and necessary for your trade or business, a test that comes up in almost every section below.

Understanding how to leverage tax deductions is crucial for small business owners who want to minimize expenses and maximize profitability. The IRS offers a wide range of deductions that can significantly reduce a business’s taxable income, but navigating these opportunities can often feel overwhelming. From home office expenses to employee benefits, each deduction requires careful documentation and adherence to specific guidelines.

Here, we help you understand many common small business tax deductions. By claiming your eligible deductions, you can reduce your tax liability, free up cash flow, and reinvest in business growth. Whether you’re a seasoned entrepreneur looking to maximize profit or a first-time filer, this guide has your back.

Quick Reference Summary Table for 2026

Tax Deduction / Provision	2026 Rule or Limit
Section 179 Cap	$2,560,000 (Phase-out starts at $4.09M)
Bonus Depreciation	100% for qualifying property placed in service
QBI Deduction (Sec. 199A)	20% of Qualified Business Income (Permanent)
Pass-Through Phase-In Thresholds	$201,750 (Single) / $403,500 (Joint)
Standard Mileage Rate	72.5¢/mi (Jan–Jun) / 76.0¢/mi (Jul–Dec)
1099-NEC Threshold	$2,000 minimum annual threshold per contractor
Business Meals	50% deductible (100% for company-wide social events)

1. Qualified Business Income (QBI) Deduction

For pass-through entities—including S-Corporations, LLCs, partnerships, and sole proprietorships—the QBI Deduction (Section 199A) is the most basic and important deduction available. These entities may deduct up to 20% of their qualified business income.

For 2026, the wage and property limits start to phase in once taxable income passes $201,750 for single filers and $403,500 for joint filers (Rev. Proc. 2025-32). The One Big Beautiful Bill Act made the deduction permanent and widened the phase-in range to $75,000 ($150,000 for joint filers).

Owners of “Specified Service Trades or Businesses” (SSTBs)—such as law, medical, consulting, and financial firms—can take full advantage of the deduction if their income remains below these phase-in thresholds.

2. Startup and Organizational Costs

Launching a small business costs money, usually before you start making money. The IRS allows new business owners to deduct certain startup and organizational costs, providing financial relief when you’re just getting started.

What Qualifies as a Startup Cost?

Startup costs are expenses incurred to create an active trade or business, or to investigate its creation or acquisition. Qualifying expenses include:

• Market Research: Analyzing potential markets, products, labor supply, and transportation facilities.
• Advertising: Promotional activities for the business opening.
• Employee Training: Salaries for employees undergoing training and their instructors.
• Travel Expenses: Costs for securing prospective distributors, suppliers, or customers.
• Professional Services: Fees for executives, consultants, or similar professional services related to startup activities.

What Qualifies as an Organizational Cost

Organizational costs are expenses directly related to forming a corporation or partnership. Qualifying expenses include:

• Legal Services: Fees for drafting legal documents such as incorporation papers, partnership agreements, and bylaws.
• Accounting Services: Costs associated with setting up accounting systems and maintaining organizational records.
• State Filing Fees: Charges for registering the business with the state.
• Organizational Meetings: Expenses for meetings held to establish the company structure.

Deduction Limits and Amortization

The IRS allows you to deduct up to $5,000 in startup costs and up to $5,000 in organizational costs during your first year of active operation (phased out if total startup costs exceed $50,000). Any remaining costs that cannot be deducted immediately must be amortized over a 180-month (15-year) period, starting from the month the business begins active operations.

Key Considerations

• Accurate Record-Keeping: Maintain detailed records and receipts of all startup and organizational expenses to substantiate deductions.
• Consult a Tax Professional: Tax laws can be complex and subject to change. Engaging with a tax advisor ensures compliance with current regulations and maximizes potential deductions.

3. Home Office Deduction

The home office deduction allows self-employed individuals and small business owners to deduct certain expenses related to the business use of their homes. To qualify, the space must be used exclusively and regularly for business purposes and be the principal place of business.

What Home Office Expenses Can Be Deducted?

Deductible expenses are categorized into:

• Direct Expenses: Costs exclusively for the home office, such as painting or repairs in that area.
• Indirect Expenses: A portion of expenses for maintaining the entire home, including:
  • Mortgage interest or rent
  • Utilities (electricity, water, gas)
  • Homeowners insurance
  • Property taxes
  • General maintenance and repairs

How to Calculate the Home Office Deduction

There are two methods to determine how much of the home office deduction you can take.

Simplified Method

Deduct $5 per square foot of the home office, up to a maximum of 300 square feet. The maximum deduction is limited to $1,500.

Regular Method

Calculate the percentage of your home dedicated to business and deduct that proportional percentage of real estate taxes, mortgage interest, utilities, home insurance, and repairs.

Key Considerations

• Maintain detailed records of expenses, including receipts and utility bills.
• Ensure the home office space is used exclusively for business to meet IRS requirements.
• Consult IRS Publication 587 or a tax professional for comprehensive guidelines and to ensure compliance.

By accurately applying the home office deduction, eligible taxpayers can reduce their taxable income, thereby enhancing their business’s financial efficiency.

4. Vehicle & Business Mileage Expenses

If you use a vehicle for business purposes, the IRS allows deductions to offset associated costs. Accurate record-keeping is essential to distinguish between personal and business use.

How to Calculate Deductible Expenses

You can choose between two methods to calculate your deduction:

• Standard Mileage Rate:
  • Jan 1 – June 30, 2026: 72.5 cents per mile.
  • July 1 – Dec 31, 2026: 76.0 cents per mile.
  • Multiply your total business miles driven by this rate.
  • Example: Driving 5,000 business miles in the first half of 2026 would yield a deduction of $3,625.
• Actual Expense Method: Track actual operational expenses, including gas, oil changes, tire replacements, lease payments, insurance, and maintenance, prorated for business use percentage.
  • Determine the percentage of business use by dividing business miles by total miles driven. Apply this percentage to your total expenses to find the deductible amount.
  • Example: With $6,000 in total vehicle expenses and 75% business use, the deduction would be $4,500.

Key Considerations

• Record-Keeping: Maintain a detailed mileage log and retain all receipts to substantiate your deductions.
• Method Selection: Choose the method that offers the greater deduction, but be aware that switching methods in subsequent years may have restrictions.
• Leased Vehicles: If you lease a vehicle and opt for the actual expenses method, you can deduct lease payments but not depreciation.

5. Office Supplies and Equipment

Purchasing office supplies and equipment is essential for running a business, and the IRS allows small business owners to deduct office and equipment costs. If you work from a home office, you can only deduct supplies and equipment used exclusively for business purposes.

Shared-use items must be prorated based on the percentage of business use.

What Qualifies as Office Supplies?

Office supplies are items used in daily business operations that are typically consumed within a year. Examples include:

• Pens, paper, and notebooks
• Printer ink and toner
• Cleaning and maintenance supplies for office use
• Postage and shipping supplies

The list, as you might imagine, is extensive. Before you claim everything you bought from U-Line, consult with a tax professional to ensure each line item is a deductible expense.

What Qualifies as Equipment?

Equipment may include longer-lasting items used to run your business, such as:

• Computers, monitors, and keyboards
• Printers, scanners, and copiers
• Office furniture like desks, chairs, and filing cabinets
• Telecommunication devices like phones or routers

It also includes much larger items, such as vehicles, heavy machinery for a construction company, or technology essential to your business operations.

Deduction Guidelines

Generally, office supplies are 100% deductible in the year they are purchased and used. It’s a bit more complex for equipment.

Equipment purchases may qualify for a full deduction under Section 179, which allows you to deduct the full cost of eligible equipment in the year it is placed in service, up to a certain limit.

For tax year 2026, the maximum Section 179 deduction is $2,560,000, with a phase-out threshold of $4,090,000. If you hit the Section 179 cap or generate an operating loss, you can apply 100% bonus depreciation with no total dollar limit.

Section 179 also covers equipment you finance rather than buy outright, as long as it’s placed in service during the year, which is why many owners time equipment financing before year-end.

Vehicles rated over 6,000 lbs. Gross Vehicle Weight Rating (GVWR)—such as heavy work trucks, large vans, and qualifying SUVs—also qualify for accelerated write-offs (certain passenger SUVs carry a Section 179 cap of $32,000, with remaining basis eligible for bonus depreciation).

Key Considerations

• Keep detailed receipts and records of all purchases.
• For larger equipment, maintain documentation showing when it was placed in service.
• Consult IRS guidelines or a tax professional to determine whether to take the Section 179 deduction or depreciate equipment over time.

6. Meals & Travel Expenses

Meals and travel expenses incurred for business purposes are generally deductible, provided they are ordinary, necessary, and directly related to your trade or business.

What Qualifies as a Meal or Travel Expense?

To qualify, travel expenses must be primarily for business purposes, and you must be away from your tax home (the general area where your business operates) substantially longer than an ordinary day’s work, requiring sleep or rest.

Deductible travel expenses include:

• Transportation: Costs of travel by airplane, train, bus, or car between your home and your business destination.
• Car Expenses: If you use your car while at your business destination, you can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees.
• Lodging: Expenses for hotels or other accommodations necessary for your trip.
• Meals: Generally, 50% of the cost of meals during business travel is deductible.
• Other Expenses: This includes dry cleaning and laundry, business calls, and tips related to these services.

An important note about that 50% meal deduction: Meals with clients, prospects, or business partners are 50% deductible, provided business is discussed and the expense is not lavish or extravagant. However, company-wide events, such as holiday parties, team retreats, or company picnics provided for all employees are 100% deductible.

Non-Deductible Expenses

The IRS does not allow deductions for expenses that are lavish or extravagant, or for personal activities during your trip.

If your trip combines business and personal activities, you can only deduct the expenses directly related to the business portion of your trip. For example, if you extend your stay for personal reasons, the additional lodging and meal expenses are not deductible.

Key Considerations

• Documentation: Maintain detailed records, including receipts, canceled checks, and bills that show the amount, date, place, and nature of each expense. Receipts aren’t required for non-lodging expenses less than $75, but these expenses must still be documented in an expense report.
• Business Purpose: Ensure that the primary purpose of the trip is business-related. Personal vacations or trips primarily for personal reasons are not deductible.
• Reasonableness: Expenses should not be lavish or extravagant. The IRS expects costs to be reasonable based on the circumstances.

7. Advertising and Marketing Costs

Advertising and marketing expenses are generally considered ordinary and necessary business expenses, making them fully deductible in most cases.

What Qualifies as Advertising and Marketing Costs?

Deductible expenses include activities directly related to promoting your business, such as:

• Online Advertising: Expenses for online advertising campaigns, including pay-per-click ads and social media promotions.
• Website Development and Maintenance: Costs associated with creating, hosting, and maintaining your business website.
• Promotional Materials: Expenses for creating promotional materials, such as brochures, flyers, and business cards.
• Sponsorships and Event Marketing: Sponsoring events or purchasing booth space at trade shows to promote your business.
• Traditional Advertising: Producing and running radio, TV, or print advertisements.

Non-Deductible Expenses

While most advertising and marketing expenses are deductible, there are exceptions:

• Political Advertising: Expenses for advertising in any publication or website used by or for a political party or candidate are not deductible.
• Personal Expenses: Costs associated with personal hobbies or activities, even if conducted with business associates, cannot be deducted as advertising expenses.

Key Considerations

• Keep Detailed Records: Maintain thorough documentation of all marketing and advertising expenses, including receipts, invoices, and contracts.
• Categorize Expenses Correctly: Ensure that advertising expenses are accurately recorded in accordance with the appropriate tax forms.
• Consult with a Tax Professional: If you’re unsure about which marketing expenses are tax-deductible or how to properly claim them, it’s advisable to consult with a tax professional.

8. Employee Salaries and Benefits

Compensation and benefits provided to employees are generally deductible business expenses, reducing taxable income for employers.

What Qualifies as Deductible Compensation and Benefits?

Deductible expenses include:

• Wages and Salaries: Payments for services performed, including regular pay, overtime, commissions, and bonuses.
• Employer-Paid Taxes: Employer’s share of Social Security and Medicare taxes (FICA).
• Retirement Plan Contributions: Employer contributions to qualified retirement plans, such as 401(k) plans.
• Health Insurance Premiums: Premiums paid for employee health insurance coverage.
• Paid Leave: Payments for vacation, sick leave, and other paid time off.
• Fringe Benefits: Other benefits provided to employees, such as tuition reimbursement, are generally deductible.

Employees themselves may now deduct up to $25,000 in qualified tips and up to $12,500 ($25,000 for joint filers) in overtime pay. However, this has no bearing on the business’s taxation.

Requirements for Deductibility

To qualify for deductions, compensation and benefits must meet the following criteria:

• Ordinary and Necessary: Expenses must be common, accepted, and appropriate for the business.
• Reasonable Compensation: Payments should align with the market rate for the services provided.
• Services Rendered: Compensation must be for actual services performed by the employee.
• Proper Classification: The recipient must be correctly classified as an employee, not an independent contractor.
• Timely Payment: Expenses must be paid or incurred during the tax year.

Amounts deemed unreasonable or not commensurate with services rendered are not deductible. Likewise, payments to sole proprietors, partners, or LLC members are generally not deductible as salaries but may be deductible as guaranteed payments or distributions.

Key Considerations

• Maintain Accurate Records: Keep detailed payroll records, including timesheets, pay stubs, and tax filings.
• Use Payroll Systems: Implement payroll software to ensure accurate calculations and compliance with tax laws.
• Understand Classification Rules: Familiarize yourself with IRS guidelines to correctly classify workers and avoid misclassification penalties.
• Stay Informed on Tax Laws: Regularly review IRS publications and consult with tax professionals to remain compliant with current regulations.

9. Professional Services

Many businesses use consultants or contractors, and the IRS permits deductions for these expenses, provided they are ordinary, necessary, and directly related to your trade or business.

What Qualifies as a Professional Service?

Deductible professional service expenses include fees paid to:

• Legal Services: Attorneys for contracts, intellectual property matters, or business disputes.
• Accounting and Tax Preparation: Certified Public Accountants (CPAs) for bookkeeping, financial reporting, or tax filing.
• Consultants: Business, marketing, or management consultants offering expert advice.
• Freelancers and Contractors: Professionals hired for specific projects, such as graphic design, copywriting, or IT services.

Key Considerations

• Invoices and Receipts: Maintain detailed invoices from service providers outlining the nature of the services rendered.
• Payment Records: Ensure payments are made through traceable methods (e.g., checks, credit cards) to provide clear documentation.
• Contracts or Agreements: File contracts or agreements with professionals as additional proof of business purpose.
• Capital Expenses: Fees related to acquiring or improving business assets (e.g., legal fees for purchasing real estate) may need to be capitalized and depreciated over time, rather than deducted in the year incurred.
• Independent Contractors: If you hire independent contractors, ensure you issue a Form 1099-NEC for payments totaling $2,000 or more in a tax year.

10. Rent and Utilities

Renting office space and paying for utilities are common expenses for many small businesses, and the IRS allows deductions for these costs if they’re directly related to business operations. These deductions help offset overhead expenses, reducing taxable income.

What Qualifies as Rent and Utility Expenses?

The following are examples of deductible expenses:

• Office Rent: Payments made for leasing office space, warehouses, or other facilities used exclusively for business.
• Co-Working Spaces: Membership fees for shared workspaces.
• Utilities: Business-related costs for electricity, water, gas, trash removal, and internet services.
• Phone Services: Business-specific phone lines or a percentage of personal phone costs if used for business.
• Equipment Rentals: Fees for leasing equipment such as copiers, machinery, or tools.

Non-Deductible Expenses

• Rent paid for personal use spaces or properties.
• Utilities related to personal portions of a mixed-use property, unless prorated for business use.
• Security deposits, unless forfeited, as these are not considered expenses.

Special Considerations for Home Offices

If you work from home, the portion of rent and utilities attributable to your home office can be deducted. Use the square footage of your office space divided by the total square footage of your home to calculate the deductible percentage. Alternatively, the IRS offers a simplified option for the home office deduction, allowing a standard deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet.

Key Considerations

• Separate Personal and Business Expenses: Clearly distinguish between personal and business expenses to avoid IRS scrutiny.
• Use Software: Use accounting software or tools to track rent and utility payments for easier reporting.
• Consult a Professional: Consult IRS guidelines or a tax professional for mixed-use properties or co-working space deductions.

11. Depreciation

Depreciation allows small business owners to deduct the gradual loss of value of assets over time. This deduction is particularly useful for large, long-term investments such as machinery, vehicles, or real estate, providing a way to recover costs while reducing taxable income.

The One Big Beautiful Bill Act, signed in July 2025, restored 100% bonus depreciation for eligible property acquired after January 19, 2025. Before it passed, the rate had dropped to 40%.

What Qualifies as Depreciation?

Assets must meet the following criteria to be depreciable:

• The asset is owned by your business.
• It is used in business operations to generate income.
• It has a determinable useful life (greater than one year).
• It is not inventory or property intended for sale.

Examples of depreciable assets include:

• Office furniture and fixtures
• Equipment and machinery
• Vehicles used for business
• Commercial real estate (excluding land)
• Technology like computers and servers

Depreciation Methods

There are several ways to calculate depreciation:

• Straight-Line Depreciation:
  • Divides the cost of the asset evenly over its useful life.
  • Example: A $10,000 asset with a 5-year useful life allows a $2,000 annual deduction.
• Modified Accelerated Cost Recovery System (MACRS):
  • The IRS requires MACRS for most business property, offering accelerated deductions in the earlier years of the asset’s life.
• Section 179 Deduction:
  • Allows you to deduct the full purchase price of qualifying assets in the year they are placed in service, up to $2,560,000 for tax year 2026.
  • The deduction begins to phase out for purchases exceeding $4,090,000.
• Bonus Depreciation:
  • Allows an additional first-year deduction on eligible assets.
  • For 2026, businesses can deduct 100% of the asset’s cost as bonus depreciation.

Key Considerations

• Review IRS Publication 946 for guidelines on depreciating property.
• Maximize savings by combining Section 179 and bonus depreciation for eligible assets.
• Consider the long-term tax impact when selecting a depreciation method.

12. Insurance Premiums

Small businesses often rely on various insurance policies to protect their operations, employees, and assets. The IRS allows deductions for many business-related insurance premiums, which can significantly reduce taxable income.

What Types of Insurance Premiums Are Deductible?

Deductible insurance expenses include:

• General Liability Insurance: Protects against claims of bodily injury or property damage.
• Commercial Property Insurance: Covers damage or loss to your business property, including buildings and equipment.
• Workers’ Compensation Insurance: Required in many states to cover employee injuries or illnesses on the job.
• Health Insurance Premiums: For employees and, in some cases, for self-employed individuals.
• Professional Liability Insurance: Also known as errors and omissions insurance, it covers claims related to professional services.
• Business Interruption Insurance: Covers lost income due to events that disrupt business operations, such as natural disasters.
• Cyber Liability Insurance: Protects against data breaches and cyberattacks.

Self-employed individuals may deduct health insurance premiums for themselves, their spouses, and dependents, but only if they are not eligible for coverage under another employer’s plan.

Non-Deductible Expenses

• Life Insurance Premiums: Premiums for life insurance policies where the business or its owner is a direct or indirect beneficiary are generally not deductible.
• Personal Disability Insurance: Premiums for personal disability insurance for the business owner are typically not deductible unless they are part of an employee benefit plan.

Key Considerations

• Keep policy statements, invoices, and proof of payment for all insurance premiums.
• Ensure policies are in the name of the business to qualify as business expenses.
• Consult with an insurance advisor to ensure you’re carrying the appropriate coverage for your business needs.
• Review IRS guidelines or work with a tax professional to confirm deductibility, especially for specialized policies.

13. Business Loan Interest

When small business owners take out business loans to fund their operations, the interest paid on those loans is often deductible. This deduction applies to various types of loans, provided the funds are used exclusively for business purposes.

What Qualifies as Deductible Interest?

You could deduct interest on traditional term loans, lines of credit or credit cards, equipment financing, real estate loans, and more. The qualification criteria is:

• Business Use: The loan proceeds must be used for business purposes, such as purchasing equipment, funding operations, or expanding the business.
• Legal Obligation: The business must be legally obligated to repay the loan.
• Lender Relationship: The loan must come from a legitimate lender (e.g., a bank or financial institution), not personal friends or family.

What doesn’t qualify is interest on personal loans or credit cards not used for business, interest on loans used for investments or assets not directly related to the business, or capitalized interest.

Key Considerations

• Track Loan Usage: Clearly separate funds used for business versus personal expenses to ensure deductibility.
• Maintain Documentation: Keep loan agreements, statements, and payment records to substantiate your claims.
• Monitor Refinancing: If you refinance a loan, only the interest on the portion used for business remains deductible.

14. Education and Training

Investing in education and training for yourself or your employees can improve business performance and may be tax-deductible. The IRS permits deductions for education expenses that maintain or improve skills required in your current trade or business.

Employers can provide up to $5,250 in tax-free educational assistance to employees annually. Amounts exceeding this limit may be taxable to the employee.

What Qualifies as a Deductible Education and Training Expense?

Deductible expenses include:

• Courses and Seminars: Classes, workshops, and seminars that enhance skills related to your current business.
• Educational Materials: Books, supplies, and subscriptions to professional publications pertinent to your field.
• Licenses and Certifications: Fees for renewing professional licenses or obtaining certifications necessary for your current business.
• Employee Training Programs: Costs associated with training employees to improve their job performance in your business.

Education that prepares you for a new line of work or expenses incurred to meet the minimum requirements of your current job or business are not deductible.

Key Considerations

• Maintain Detailed Records: Keep receipts, invoices, and course descriptions to substantiate the business relevance of the education.
• Proof of Payment: Ensure you have documentation showing payment of the expenses, such as bank statements or credit card receipts.
• Ensure Direct Business Connection: The education must directly relate to your current business activities.
• Avoid Personal Education Expenses: Personal development courses unrelated to your business are not deductible.
• Consult IRS Publications: Refer to IRS Topic No. 513 for detailed information on work-related education expenses.

15. Charitable Contributions

Charitable contributions made by small businesses to qualifying organizations can be a meaningful way to support communities while also benefiting from tax deductions. However, the IRS has specific guidelines for claiming these deductions.

What Qualifies as a Deductible Charitable Contribution?

To qualify, contributions must meet the following criteria:

• Qualified Organization: The donation must be made to a qualified nonprofit organization, such as 501(c)(3) charities, religious organizations, or educational institutions.
• Type of Contribution: Contributions can include cash, property, or in-kind donations (e.g., equipment or inventory).
• Business Connection: Donations must be made directly by the business and not reimbursed to an individual.

Contributions to political campaigns or lobbying groups, donations made to individuals, and volunteered time or services are not deductible.

Deduction Limits

• C Corporations: C Corporations can deduct charitable contributions up to 10% of their taxable income. Starting in 2026, only the amount above 1% of taxable income counts, so a corporation with $1,000,000 of taxable income deducts nothing on the first $10,000 it gives.
• Pass-Through Entities: For sole proprietors, partnerships, and S Corporations, charitable deductions are claimed on the individual owner’s tax return, subject to personal income limits. These limits are typically 60% of adjusted gross income (AGI) for cash donations to public charities.

Key Considerations

• Receipts: Retain receipts or written acknowledgment from the organization for donations of $250 or more.
• Form 8283: For non-cash contributions exceeding $500, file Form 8283 (Noncash Charitable Contributions).
• Appraisals: Provide a fair market value appraisal for donated property exceeding $5,000.
• Verify Eligibility: Use the IRS Tax Exempt Organization Search tool to confirm the recipient organization is qualified.
• Detailed Records: Keep detailed records of all charitable contributions, including the purpose, date, and amount of the donation.
• Inventory Donations: If donating inventory, deduct the lesser of its fair market value or cost basis.

16. Retirement Plan Contributions

Small business owners who offer retirement plans to employees—or contribute to their own plans—can deduct these contributions, providing both a tax benefit and a valuable employee perk. The IRS offers several options for retirement plans, each with specific rules for deductions.

What Types of Retirement Plans Are Deductible?

Deductible contributions can be made to the following types of plans:

• SEP IRAs (Simplified Employee Pension): Designed for self-employed individuals and small business owners, contributions are tax-deductible up to 25% of an employee’s compensation, with a maximum limit of $72,000 in 2026.
• SIMPLE IRAs (Savings Incentive Match Plan for Employees): Employers can deduct contributions up to $17,000 in 2026, with an additional catch-up contribution limit of $4,000 for employees aged 50 or older.
• 401(k) Plans: Employer contributions to traditional 401(k) plans are fully deductible, with the total contribution limit (including employee and employer contributions) increasing to $72,000 in 2026.
• Solo 401(k) Plans: For self-employed individuals, employer contributions are deductible up to the same limits as traditional 401(k) plans.

Contributions exceeding the IRS annual limits or personal retirement savings outside of a qualified business plan do not qualify.

Self-employed business owners can deduct contributions to their own SEP IRA or Solo 401(k) plans as both employer and employee, within IRS limits. Retirement plan setup costs may also qualify for the Retirement Plans Startup Costs Credit, providing up to $5,000 per year for the first three years.

Key Considerations

• Maintain records of all contributions, including amounts and dates.
• Retain plan documents and IRS approval letters for the selected retirement plan.
• Use a third-party administrator or payroll service to ensure compliance with contribution and filing requirements.
• Review IRS Publication 560 for detailed guidelines on retirement plans for small businesses.
• Work with a financial advisor to choose the best retirement plan for your business and ensure contributions are tax-efficient.
• Contribute early in the tax year to maximize potential investment growth and benefits for employees.

17. Business Licenses and Permits

Obtaining necessary licenses and permits is essential for operating a business legally, and the IRS allows small business owners to deduct these costs as ordinary and necessary business expenses.

What Qualifies as Deductible Licenses and Permits?

Deductible expenses include:

• Business Licenses: Fees required to legally operate your business at the local, state, or federal level.
• Health and Safety Permits: For businesses in industries like food service or manufacturing.
• Professional Licenses: Such as licenses for real estate agents, attorneys, or accountants.
• Environmental Permits: Required for businesses that deal with waste management or hazardous materials.
• Zoning Permits: For businesses operating in specific locations.

Fees or penalties for late license renewals, and payments for licenses or permits unrelated to your current business operations do not qualify.

Annual fees are typically fully deductible in the year they are paid. Initial licensing costs may need to be amortized over several years if they provide a long-term benefit.

Key Considerations

• Keep records of all payments made for licenses and permits, including receipts and renewal notices.
• Maintain copies of the actual licenses or permits as proof of compliance.
• Verify that all required licenses and permits for your business are current to avoid penalties.
• Use accounting software to track these expenses and categorize them correctly for tax reporting.
• Consult a tax professional if you’re unsure whether a particular fee is deductible.

18. Moving Expenses

If your business relocates, you may be able to deduct certain moving expenses. The IRS allows deductions for costs directly related to moving equipment, supplies, and inventory to a new business location, provided the move benefits your business operations.

What Qualifies as a Deductible Moving Expense?

Deductible expenses include:

• Transportation Costs: Expenses for moving business equipment, furniture, and inventory.
• Packing Materials and Supplies: Costs for boxes, tape, and other materials used to pack business items.
• Rental Expenses: Fees for moving trucks or storage units used during the relocation.
• Professional Movers: Payments made to moving companies for handling business-related items.
• Utility Connection or Disconnection Fees: Charges for setting up or terminating utilities at the new or old business location.

Personal moving expenses or employee relocation expenses are generally not deductible by an employer. If you operate a home-based business, only the portion of moving expenses directly related to the business (e.g., moving office equipment or inventory) is deductible.

Key Considerations

• Receipts and Invoices: Keep all documentation related to moving expenses, including receipts from moving companies, rental agreements for trucks or storage units, and invoices for packing materials.
• Detailed Records: Maintain a log of the items moved and their business purpose to substantiate the deduction.
• Accurate Record-Keeping: Use accounting software to track and categorize moving expenses accurately.
• Consult IRS Guidelines: Review IRS publications or consult a tax professional to ensure compliance and maximize your deduction.
• Separate Personal and Business Expenses: Clearly distinguish between personal and business moving expenses to avoid potential audit issues.

19. Bad Debt

When your business is unable to collect payment for goods or services provided on credit, that’s bad debt. The IRS allows small business owners to deduct bad debts, reducing taxable income and offsetting losses.

What Qualifies as Deductible Bad Debt?

To qualify, the bad debt must meet the following criteria:

• Business-Related Transaction: The debt must arise from a bona fide business transaction, such as sales to customers, loans to clients, suppliers, distributors, or employees, or business loan guarantees.
• Inclusion in Income or Cash Loaned: You must have previously included the amount in your income or loaned out your cash.
• Worthlessness: The debt is considered wholly or partially uncollectible. You must be able to demonstrate that you’ve made reasonable efforts to collect the debt and that it has become worthless.

Examples include:

• Unpaid Invoices: Accounts receivable for goods or services provided that remain unpaid.
• Loans to Business Associates: Loans to clients, suppliers, distributors, or employees that were not repaid.
• Business Loan Guarantees: Debts arising from guarantees of business loans that have become uncollectible.

Non-business debts are not tax-deductible. Likewise, if you use the cash method of accounting, you generally cannot deduct bad debts because income is not recognized until cash is received.

How to Write Off Bad Debt

Writing off bad debt is a 3-step process:

1. Identify Uncollectible Accounts: Review outstanding accounts and determine which are unlikely to be collected.
2. Document Efforts to Collect: Maintain records of correspondence, phone calls, or collection agency reports to demonstrate reasonable efforts to collect the debt.
3. Record the Bad Debt: Use your accounting system to record the bad debt as an expense, reducing your business’s income for tax purposes. For accrual basis taxpayers, this is typically done by debiting bad debt expense and crediting accounts receivable.

Key Considerations

• Invoices and Contracts: Keep copies of invoices, contracts, or any documents that establish the debt.
• Collection Efforts: Retain evidence of attempts to collect the debt, such as emails, letters, or records of phone calls.
• Financial Records: Ensure your accounting records accurately reflect the bad debt expense.
• Consult IRS Guidelines: Review IRS Topic No. 453 for detailed information on bad debt deductions.
• Timely Deduction: Claim the deduction in the tax year the debt becomes worthless. If you realize you could have reported and taken a deduction for an unpaid debt years ago but didn’t, you generally have seven years from the original due date to amend your return and claim it (most other changes allow only three).
• Professional Advice: Consider consulting a tax professional to ensure compliance and proper handling of bad debt deductions.

Explore Financing with SBG

There are many ways to lower your business tax bill each year. Likewise, there are many ways to fund your next opportunity or growth venture. SBG Funding offers a range of financing options to help your business.

Get Started Today:

• Fill out our online application.
• Speak with a funding specialist to discuss your options.
• Submit your documents and receive funding quickly.

Typical Requirements:

• Your four most recent bank statements
• Driver’s license (ID)
• Voided check
• Minimum FICO score of 500, six months in business, and $150,000 in annual revenue