Small Business Tax Deductions & Credits: Practical Tips for New Owners

Income taxes can feel overwhelming, especially in your first few years as a small business owner. You’re learning fast, making decisions daily, and doing your best to keep everything moving forward.

Tax deductions play a direct role in how much of your revenue you may keep. Every legitimate write-off can help lower your taxable income and preserve cash you can reinvest into your business.

Being prepared can make a real difference.  

Recent legislation, including the One Big Beautiful Bill Act (OBBBA), introduced or expanded several write-offs for small businesses in the 2025 and 2026 tax years. Understanding what could apply to your business, and keeping the right documentation, can make a meaningful difference when it’s time to file.

When you’re just getting started, it’s not always obvious which deductions could apply to you. Owners who try to reconstruct expenses at year end may discover missing documentation or overlooked expenses. Staying current on tax law changes can be challenging, even for professionals.

Below, we outline common small business tax deductions and credits, along with practical steps you can use to stay organized and reduce your tax liability.

This article is for informational purposes only and is not tax advice. Not every deduction is right for every business. You should consult a qualified tax professional before making filing decisions.

How Small Business Tax Deductions Work

Small business tax deductions lower the amount of income subject to tax, which can help you keep more of what your business earns. When an expense is considered “ordinary and necessary” for running your business, the IRS generally allows you to deduct it, reducing your overall tax liability.

What Are Small Business Tax Deductions?

A small business tax deduction is a business expense the IRS allows you to subtract from your taxable income. Because taxes are calculated on your net income, not total revenue, deductions can reduce what you owe.

To qualify, expenses must be ordinary and necessary for your business:

• Ordinary means common and accepted in your industry.

• Necessary means helpful and appropriate for operating your business.

For example, office supplies, software subscriptions, professional services, and payroll expenses are typically deductible because they directly support business operations.

You may hear the terms “deducting” and “writing off” used interchangeably. Both refer to claiming eligible business expenses to reduce taxable income. The key is ensuring each expense deduction is business-related and properly documented.

How Small Business Tax Deductions Work

Claiming deductions isn’t complicated, but it does require consistency. Most small business owners follow a simple process: track expenses, keep documentation, categorize costs correctly, and report eligible deductions when filing taxes.

• Track business expenses: Record expenses as they occur instead of trying to reconstruct them later.  

• Keep supporting documentation: Save receipts, invoices, mileage logs, and payment records.  

• Categorize expenses accurately: Organizing expenses into categories, such as supplies, rent, utilities, professional services, or payroll taxes, makes tax preparation easier and reduces the risk of overlooking deductions.

• Deduct eligible expenses when filing: When you file your tax return, qualifying expenses are subtracted from your business income, lowering your taxable income and potentially reducing your tax bill.

Documentation Requirements

To claim business deductions, you need records that show the expense was business-related and accurately reported.  

• Keep receipts and invoices: Save receipts, invoices, and payment confirmations for purchases related to your business.  

• Maintain mileage and business travel records: If you deduct vehicle or travel expenses, keep a mileage log that includes dates, destinations, purpose of the trip, and miles driven.  

• Use organized accounting records: Accurate bookkeeping provides a clear record of income and expenses throughout the year. Accounting software or a bookkeeping system can help categorize expenses and simplify review at tax time.  

• Retain payroll and benefits records: If you have employees, payroll reports can help you document wages, employer payroll taxes, and benefit contributions. Using a payroll service built for small business can help make it easier to keep these records organized and accessible throughout the year.

Legislative Updates: What’s New This Year?

Recent legislation, including the One Big Beautiful Bill Act (OBBBA), introduced changes that may affect how some small businesses deduct expenses.

Some provisions may allow businesses to do the following:

• Deduct a larger portion of equipment and technology purchases

• Expense research and development costs more quickly

• Benefit from adjustments to reporting thresholds and eligibility rules

• Continue using the Qualified Business Income (QBI) deduction where applicable

Because eligibility and implementation details can vary based on your business structure, income level, and state requirements, it’s important to check with a financial professional to determine how these changes may apply to your situation.

Common Small Business Tax Deductions

Many small business expenses qualify as tax deductions, which can help you reduce your taxable income and improve cash flow. The categories below highlight common deductions that very small business owners should review each year.

For each deduction, we explain what it is, who it may apply to, why it could matter, and what documentation can help.

Startup and Organizational Costs

Certain expenses you incur before your business officially opens may be deductible as startup or organizational costs.

Startup costs generally cover expenses related to researching, planning, and launching your business, such as:

• Legal and registration fees

• Market research and feasibility studies

• Initial advertising and branding

• Professional consulting services

Organizational costs might include expenses associated with forming a legal entity, such as incorporation or partnership agreements.

The IRS allows businesses to deduct up to a specified amount of startup and organizational costs in the first year, with remaining costs typically amortized over time. Because limits and timing rules change, confirm current thresholds with a tax professional.

Who it may apply to: This deduction applies to new business owners who incurred expenses before beginning operations.

Why it may matter: Startup expenses can add up quickly. Deducting eligible costs can help offset early investments and reduce taxable income during your first year of operation.

Documentation to keep: Maintain invoices, receipts, contracts, and payment records for all startup-related expenses to support your deductions.

Home Office Deduction

If you use part of your home regularly and exclusively for business, you might qualify for a home office deduction. To be eligible, the space must be:

• Used regularly for business activities

• Used exclusively for business purposes

• Your principal place of business or a place where you meet clients or conduct administrative work

Eligible expenses might include:

• Rent or mortgage interest
• Utilities
• Internet service
• Property taxes
• Homeowners or renters' insurance

The IRS offers two ways to calculate the deduction.

With the simplified method, you deduct a standard rate per square foot of qualifying workspace (up to a maximum size). Planning for this method can make recordkeeping easier.

The regular method calls for calculating the percentage of your home used for business and deducting the proportional share of actual expenses. This method can produce a larger deduction but requires more documentation.

Who it may apply to: This deduction is commonly used by self-employed individuals, freelancers, independent contractors, and microbusiness owners who operate from home.

Why it may matter: The home office deduction can allow you to claim a portion of housing expenses, which can help offset the cost of running your business from home.

Documentation to keep: Maintain records of square footage, utility bills, rent or mortgage statements, real estate documents, and other home-related expenses used to calculate your deduction.

Business Supplies, Equipment & Software

Items you purchase to operate and grow your business can qualify as deductible expenses.  

Common deductible items in this category can include:

• Office supplies and materials

• Computers, printers, and business equipment

• Tools and machinery used in operations

• Business software and cloud-based subscriptions

• Website hosting and productivity platforms

Smaller purchases are often deducted in the year they are purchased. Higher-cost equipment may be depreciated over time, although other options may allow immediate deduction.

Section 179 of the IRS tax code allows many small businesses to deduct the full cost of qualifying equipment and software in the year it is placed into service. Eligibility limits and thresholds apply, so confirm current rules with a tax professional.

Who it may apply to: This deduction may apply to most small business owners who purchase supplies or equipment used for business purposes.

Why it may matter: Everyday operating tools add up. Deducting eligible purchases can help reduce taxable income while helping you make sure you have the resources to run your business efficiently.

Documentation to keep: Save receipts, invoices, and payment records. Maintain notes showing the item’s business use, especially for equipment that could be used for both personal and business purposes.

Business Mileage & Vehicle Use

If you use a vehicle for business purposes, you might be able to deduct certain driving expenses.

Business mileage includes trips taken for activities such as:

• Traveling to meet clients or customers

• Making business-related deliveries or supply runs

• Traveling to professional meetings or training

The IRS allows two methods for calculating vehicle deductions.

With the standard mileage rate, you deduct a set rate per business mile driven. This rate, commonly used by small businesses, may make mileage easier to track.

The actual expense method is a bit more detailed but can produce a larger deduction. With this method, you deduct the business-use portion of actual vehicle costs such as fuel, maintenance, insurance, registration, and depreciation.

Who it may apply to: This deduction may apply to small business owners and self-employed individuals who use a personal or business vehicle for work-related travel.

Why it may matter: Vehicle expenses can add up quickly. Tracking business mileage can help you recover a portion of those costs and reduce taxable income.

Documentation to keep: Maintain a mileage log that records dates, destinations, business purposes, and miles driven. If you use the actual expense method, keep receipts and records for vehicle-related expenses.  

Rent & Utilities for Business Space

For many small and microbusiness owners, workspace costs qualify as deductible expenses, including:

• Office or retail space rent

• Coworking or shared workspace fees

• Utilities such as electricity, water, and trash service

• Internet and phone service used for business operations

• Maintenance or common area fees required by the lease

Keep in mind that when utilities or services are used for both business and personal purposes, only the portion related to business use is deductible.  

Who it may apply to: This deduction may apply to business owners who operate from a rented office, storefront, studio, or coworking space.

Why it may matter: Deducting eligible workspace expenses can help offset overhead and reduce taxable income, which can make it easier to manage ongoing operating costs.

Documentation to keep: Maintain lease agreements, invoices, and utility bills to support your deductions.

Professional Services (Legal, Accounting, Bookkeeping)

Fees paid to professionals who support your business operations often qualify as deductible business expenses. Deductible professional services can include:

• Accountants and CPAs

• Bookkeepers and payroll professionals

• Attorneys and legal advisors

• Tax preparation and filing services

Who it may apply to: This deduction can apply to business owners who hire professionals to help manage finances, maintain compliance, or support business decisions.

Why it may matter: Professional guidance can help you maintain accurate records, meet filing requirements, and make informed financial decisions.  

Documentation to keep: Maintain invoices, engagement agreements, and payment records for professional services.

Business & Liability Insurance Premiums

Insurance premiums for policies that protect your business may qualify as deductible business expenses.

Deductible business insurance can include:

• General liability insurance

• Professional liability (errors & omissions) coverage

• Commercial property insurance

• Workers’ compensation insurance

• Business interruption coverage

• Cyber liability insurance

• Commercial auto insurance

Who it may apply to: This deduction can apply to business owners who carry insurance to protect business operations, property, employees, or professional services.

Why it may matter: Insurance can help protect your business from financial loss and liability. Deducting eligible premiums can help offset the cost of maintaining appropriate coverage.

Documentation to keep: Maintain policy documents, premium invoices, and payment records to support your deduction.

Marketing & Advertising Costs

Expenses related to promoting and growing your business could qualify as deductible business expenses. Deductible marketing and advertising costs could include:

• Website hosting and domain registration

• Branding and logo design

• Digital advertising and social media ads

• Search engine marketing and online listings

• Printed materials such as business cards, brochures, or signage

• Email marketing platforms and marketing software

Who it may apply to: This deduction can apply to business owners who promote their products or services to attract customers and build brand awareness.

Why it may matter: Marketing can help your small business reach new customers and maintain visibility in a competitive market. Deducting eligible expenses can help offset the cost of your growth-focused efforts.

Documentation to keep: Maintain invoices, receipts, contracts, and payment confirmations for marketing services, advertising platforms, and promotional materials.

Wages, Employer Taxes & Payroll Costs

Compensation and payroll-related expenses are typically deductible business costs when you employ workers.

Deductible payroll expenses can include:

• Employee wages and salaries

• Employer-paid payroll taxes, including the employer share of Social Security and Medicare (FICA)

• Federal unemployment tax (FUTA)

• State unemployment insurance (SUI) taxes

• Certain employee benefits, such as health insurance contributions

Who it may apply to: This deduction can apply to business owners who employ staff and are responsible for payroll processing and related tax obligations.

Why it may matter: Building a team requires a meaningful financial commitment. Payroll deductions can help offset those costs and make workforce growth more sustainable.

Documentation to keep: Maintain payroll registers, tax filings, payment confirmations, and benefits records to support your deductions.

Payroll reports provide a clear record of wages, employer taxes, and benefits. Using a payroll service like SurePayroll can help owners keep these records accessible at tax time.  

Contributions to Employee Retirement Plans

Employer contributions to qualified employee retirement plans are generally deductible business expenses. Deductible contributions can include employer-funded amounts paid into qualified retirement plans such as:

• SEP-IRA plans

• SIMPLE (Savings Incentive Match Plan for Employees) IRA plans

• 401(k) plans, including employer matching contributions

• Profit-sharing plan contributions

Annual contribution limits and eligibility rules vary by plan type. A financial advisor or tax professional can help determine the appropriate plan and contribution levels for your business.  

SurePayroll also offers 401(k) plans built for small business owners.  

Employee salary deferrals are not deductible by the employer, but employer contributions typically are.

Who it may apply to: This deduction may apply to business owners who offer retirement benefits to employees and contribute to their plans.

Why it may matter: Offering retirement benefits can help attract and retain employees while supporting their long-term financial security. The ability to deduct contributions can help offset the cost of providing this valuable benefit.

Documentation to keep: Maintain plan documents, contribution records, and payment confirmations to support your deductions.

Small Business Tax Credits

While deductions lower taxable income, tax credits directly reduce the taxes you owe. Some credits are designed to encourage hiring, employee benefits, and workplace support. The following sections outline a selection of credits for small business owners to consider.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC), available through the end of 2025 according the IRS, provides a federal tax credit to employers who hire individuals from certain targeted groups that face barriers to employment, including veterans, long-term unemployment recipients, and individuals receiving specific public assistance benefits.

To claim the credit, employers must obtain certification from their state workforce agency shortly after the employee begins work

When available, the WOTC can help offset a portion of wages paid to qualified employees while supporting inclusive hiring efforts. Maintain certification forms, hiring documentation, and payroll records to support the credit.

Retirement Plan Startup Credit

The retirement plan startup credit can help eligible small businesses offset the cost of establishing a new employee retirement plan.

According to the IRS, qualifying expenses can include plan setup and administrative costs, employee educational expenses, and certain employer contributions. This credit is generally available to small employers starting a retirement plan for the first time.

Make sure to confirm current rules with a tax professional.

Health Insurance & HSA-Related Credits (If Applicable)

Providing health coverage may make your business eligible for tax advantages that can help offset costs.

Some small employers may qualify for a federal tax credit when they contribute toward employee health insurance premiums. Employer contributions to employee Health Savings Accounts (HSAs), when paired with qualifying high-deductible health plans, this may also be deductible.

Maintain records of premium payments, employer contributions, and plan documentation to substantiate eligibility.

Paid Family & Medical Leave Credit

The Paid Family & Medical Leave (PFML) credit may be available to employers who voluntarily provide paid leave for qualifying family or medical reasons.

Eligibility requirements are specific, and the credit has historically been temporary and subject to renewal.  

When available, this credit can help offset a portion of wages paid during qualified leave while supporting employee well-being. Maintain written leave policies and payroll records documenting leave wages.

Confirm with a tax professional whether the credit is active for the current tax year and how it may apply to your business.

Tax Deductions for Self-Employed

If you operate as a sole proprietor, independent contractor, or single-member LLC, many of the deductions discussed above could apply to your business. In addition, self-employed individuals may qualify for several tax adjustments tied specifically to how they pay taxes and fund their own benefits.

Self-employed individuals pay both the employer and employee portions of Social Security and Medicare taxes, but the employer-equivalent portion may be deductible when calculating adjusted gross income.

If you purchase health insurance for yourself, your spouse, or dependents, eligible premium costs might be deductible, depending on income and coverage requirements.

Contributions to qualified retirement plans for self-employed individuals, such as SEP IRAs, SIMPLE IRAs, or solo 401(k)s, might also reduce taxable income while helping you build long-term savings.

Because eligibility rules and limits vary, confirm what applies to your situation.  

You can use our self-employment tax calculator to estimate your self-employment tax liability.  

How to Maximize Deductions Without Overcomplicating Your First Year

In your first year of business ownership, it’s easy to feel pressure to track everything perfectly. But maximizing deductions doesn’t require complex systems. A few consistent habits can help you stay organized, support your tax filings, and reduce stress when tax season arrives.

Once you’ve identified which deductions and credits may apply to your business, the next step is making sure you have the right records in place to document them – and knowing when it makes sense to get professional help.

Separate Personal & Business Finances

Keeping business and personal finances separate helps create a clear audit trail and c can help simplify reconciliation at tax time. Using a dedicated business bank account and payment method helps you track expenses accurately and reduce the risk of overlooking deductible costs.

Create a Simple Documentation Routine

A simple system can prevent last-minute scrambling. Maintain monthly expense folders (digital or paper), save receipts as you receive them, and track mileage as trips occur. If you have employees, retain payroll reports to document wages, employer taxes, and benefit contributions.

When to Call a Tax Professional

Some situations benefit from professional guidance, especially in your first year of business or when navigating more complex deductions and credits. This can help confirm that you’re on the right track or help you spot things you might need in the future.  

In a SurePayroll survey of 2,000 adults – including CPAs and bookkeepers – tax professionals reported that viewing tax code updates and correcting misinformation are among the most challenging parts of the tax season. Many also cited incomplete or delayed documentation as a common source of stress.  

Working with a tax professional and keeping organized records throughout the year can help streamline the filing process.  

Where Payroll Fits into Tax Preparation

If you have employees, payroll plays an important role in keeping your tax records organized and ready when filing time arrives. Accurate wage reporting, tax deposits, and withholding documentation support compliance and make it easier to substantiate deductions and credits tied to payroll expenses.

Payroll systems don’t replace professional tax guidance, but they can help simplify recordkeeping and reduce the administrative burden tax preparation.

What Payroll Reports Provide

Payroll reports create a clear record of employee compensation and tax activity throughout the year. These reports typically include:

• Wage summaries and earnings details

• Employer tax deposits and payment records

• Withholding and contribution reports

Maintaining these records can help support your year-end filings and provide documentation if questions arise.

How Payroll Supports Deductions & Credits

Organized payroll records help document employee wages, employer payroll taxes, and benefit contributions — all which can factor into deductions and certain tax credits.

Centralized reporting can also help reduce manual errors and delays that can occur when information must be gathered from multiple sources.  

Using a payroll service like SurePayroll can help you streamline recordkeeping and access important reports when you need them.

Checklist for New Business Owners

If you’re preparing to file – or planning ahead for next year – this checklist can help you create action steps.  

Before filing your return, review your records to confirm you’ve captured the deductions, credits, and documentation that apply to your business.

Deductions to explore can include:

• Startup and organizational costs

• Home office use

• Supplies, equipment, and software

• Professional services and insurance

• Marketing and advertising

• Rent and utilities

• Wages, payroll taxes, and benefits

If you’re self-employed, you may also qualify for adjustments related to self-employment taxes, health insurance premiums, and retirement contributions.

Potential credits to review can include:

• Work Opportunity Tax Credit

• Retirement plan startup credit

• Small business health coverage incentives

• Paid family and medical leave credit

Eligibility requirements vary, so confirm with a tax professional which programs may apply to you.

Documentation to gather may include:

• Receipts and invoices

• Mileage logs

• Bank and credit card statements

• Accounting records

• Payroll reports and tax deposit records (if applicable)

Consider your questions for the tax professional you’ll be consulting, such as:

• Which deductions or credits apply to my business?

• Have recent tax law changes affected my filing?

• How can I simplify next year’s tax preparation?

• Are there compliance risks I should address now?

Not every deduction or credit applies to every business. Requirements vary based on structure, income, location, and industry. It can be valuable to consult with a tax professional for guidance.

Conclusion

Tax rules may be complex, but your approach doesn’t have to be. Keeping accurate records, understanding available deductions, and asking questions when needed can help reduce stress and prevent costly oversights.

When documentation is organized and accessible, filing becomes simpler and you can return your focus to running and growing your business. A dependable payroll service can help also keep essential records in order, so you can focus on the work that matters most.

If you’re preparing for your first tax season or planning to hire employees, check out these resources to help you take the next step:  

• Understanding payroll taxes for small businesses

• Tips to make tax season easier

• How to set up a payroll account in 8 steps