The IRS allows small businesses to deduct "ordinary and necessary" business expenses — costs that are common in your industry and helpful for running your business. Most small business owners miss 10–20% of their legitimate deductions simply because they don't know what qualifies. This guide covers every major category.
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Home Office Deduction
If you use part of your home regularly and exclusively for business, you can deduct a portion of your housing costs.
Two calculation methods
- Simplified method: $5 per square foot of dedicated office space, up to 300 sq ft = maximum $1,500/year. Easy to calculate, no depreciation recapture.
- Regular method: Calculate the percentage of your home used for business (office sq ft ÷ total home sq ft) and apply that percentage to actual home expenses (mortgage interest/rent, utilities, insurance, repairs). More complex but often yields a larger deduction.
The "exclusive use" requirement is strict. A desk in your bedroom doesn't qualify. A dedicated room used only for business does. A room that doubles as a guest bedroom does not.
Vehicle and Mileage
Business use of your vehicle is deductible. Two methods:
- Standard mileage rate (2026): 70 cents per mile for business driving. Track every business mile with a mileage log (date, destination, business purpose, miles).
- Actual expense method: Deduct the business-use percentage of actual vehicle costs (gas, insurance, maintenance, depreciation). Better for high-cost vehicles with high business use.
Commuting (home to office) is never deductible. Driving from your office to a client meeting is deductible. If your home is your office, driving from home to any business location is deductible.
Apps like MileIQ or Everlance automatically track mileage — worth the $5–$10/month to ensure you capture every deductible mile.
Equipment and Section 179
Business equipment (computers, machinery, furniture, software) is deductible. You have two options:
- Section 179 expensing: Deduct the full cost of qualifying equipment in the year of purchase, up to $1,220,000 in 2026. This accelerates your deduction vs. depreciating over multiple years.
- Bonus depreciation: 40% bonus depreciation available in 2026 (phasing down from 100% in 2022). Applies to new and used equipment.
- Standard depreciation: Deduct the cost over the asset's useful life (5–7 years for most equipment).
For most small businesses, Section 179 is the simplest and most beneficial option — deduct the full cost in year one.
Health Insurance Premiums
Self-employed individuals can deduct 100% of health insurance premiums paid for themselves, their spouse, and dependents — as an adjustment to income (not just an itemized deduction). This is one of the most valuable deductions available to self-employed people.
Limitation: you can't deduct more than your net self-employment income. And if you're eligible for employer-sponsored health insurance through a spouse's employer, you can't take this deduction.
Retirement Plan Contributions
Contributing to a retirement plan reduces your taxable income dollar-for-dollar. Self-employed options:
| Plan | 2026 Contribution Limit | Best For |
|---|---|---|
| SEP-IRA | Up to 25% of net self-employment income, max $70,000 | High earners, simple setup |
| Solo 401(k) | $23,500 employee + 25% employer = up to $70,000 | Maximum contributions, Roth option |
| SIMPLE IRA | $16,500 employee + 3% employer match | Small businesses with employees |
A solo 401(k) allows the highest contributions for most self-employed people — especially those with moderate income who want to maximize tax-deferred savings.
Other Commonly Missed Deductions
- Business meals: 50% deductible when directly related to business (client meetings, business travel meals). Keep receipts with notes on who attended and the business purpose.
- Professional development: Courses, books, conferences, and subscriptions directly related to your business are fully deductible.
- Software and subscriptions: Business software (accounting, project management, design tools), professional subscriptions, and cloud services are fully deductible.
- Bank fees and interest: Business bank account fees, merchant processing fees, and interest on business loans are deductible.
- Marketing and advertising: Website costs, paid ads, business cards, and promotional materials are fully deductible.
- Professional services: CPA fees, attorney fees, and business consulting fees are deductible.
- Phone and internet: The business-use percentage of your phone and internet bill is deductible. If you use your phone 60% for business, deduct 60% of the bill.
- QBI deduction (Section 199A): Pass-through businesses (sole proprietors, partnerships, S-corps) may deduct up to 20% of qualified business income. Income limits apply. This deduction is scheduled to expire after 2025 unless extended — check current law.
FAQ
What records do I need to keep for business deductions?
Keep receipts, bank statements, and credit card statements for all business expenses. For meals, note the business purpose and attendees. For mileage, keep a log. The IRS requires records for 3–7 years depending on the type of return.
Can I deduct startup costs?
Yes — up to $5,000 in startup costs and $5,000 in organizational costs in the first year of business. Costs above $5,000 must be amortized over 15 years.
Is a business credit card required for deductions?
No — but using a dedicated business credit card makes tracking much easier and provides a clear paper trail. Personal expenses on a business card are not deductible; business expenses on a personal card are deductible but harder to document.
Can I deduct my entire phone bill?
Only the business-use percentage. If you use your phone 70% for business, deduct 70% of the bill. If you have a phone used exclusively for business, deduct 100%.
The best tax strategy is year-round tracking, not a scramble in April. Use accounting software (QuickBooks, FreshBooks, Wave) to categorize expenses as they happen. Work with a CPA who specializes in small business taxes — the deductions they find typically far exceed their fee.
