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Top Small Business Tax Deductions
There are tax deductions that most small business owners know about, like meals and travel expenses. There are also lesser-known ones that can mean big savings. These include:
- Qualified Business Income (QBI) Deduction for Pass-Through Entities
- Home Office Deduction
- Business Vehicle Write Off
- Startup & Organizational Cost Deductions
- Section 179 & Bonus Depreciation
This guide to small business tax deductions shares how each one functions, when you qualify for it, and gives you concrete examples for how to calculate the tax write-off. Here’s a quick table to help you know which ones may apply so you can skip to the most relevant sections.
| Deduction | Who It’s For | Key Requirement | Main Benefit |
| QBI | Pass-through businesses with net income | Having qualified business income | 20% deduction |
| Home Office | Owners using a dedicated home workspace | Exclusive and regular use of the space | Significant offset to personal expenses |
| Vehicle Use | Owners who drive a personal car for business | A detailed mileage log and expense records | Can cover 50% or more of car ownership costs |
| Startup Costs | New businesses in their first year | Costs must be before day 1 in business | Conserve cash in year 1 |
| 179 & Bonus Depreciation | Businesses buying long-term assets | Property eligibility | Deduct up to 100% of the asset’s cost (179) or 40% (bonus) |
Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction (also called a Section 199A from IRS publication 535 lets owners of pass-through entities (companies where income is passed through to the owner or owners who report it on their personal income taxes) deduct up to 20% of business income from personal taxes.
You likely qualify for the QBI tax write-off when:
- You own a pass-through entity (Sole Prop, LLC, S-Corp.).
- Your business had positive U.S. net income.
- Your income is from the business, not other sources.
That means you likely don’t qualify when:
- You own a C-corp.
- Your business lost money.
- Your income is wages, guaranteed payments, or investment income (interest, dividends, capital gains).
- Self-employment income can qualify, and there’s also a separate REIT/PTP component.
Note: QBI is scheduled to sunset after 2025 under current law unless extended.
How the QBI Works
The QBI deduction equals the lesser of (a) 20% of QBI, or (b) 20% of taxable income minus net capital gain (plus the REIT/PTP component, if any).
Pro-tip: IRS income thresholds for QBI change each year and if you make more than the threshold you must use a different calculation for the QBI deduction. Check with your tax professional when you make more than the limit.
Imagine your LLC generates $120,000 in revenue and you have $30,000 in expenses. Your business income would be $90,000. If your total taxable income including all other income and deductions is $85,000, here is how you calculate the QBI deduction:
- Calculate 20% of your QBI:
- 20% x $90,000 = $18,000
- Calculate 20% of your taxable income:
- 20% x $85,000 = $17,000
- Take the lesser of the two amounts.
In this case, your QBI deduction is $17,000. If your effective tax rate is 30%, the QBI deduction saves you $5,100 in taxes.
Thresholds and Limitations
QBI thresholds can limit your total deduction. Check the IRS website to get the current tax year limits. If you make more than the taxable income threshold for your filing status (single, married, etc.) then one or both of these limitations apply:
- Specified Service Trade or Business (SSTB)
- W-2 wage and property limit
Specified Service Trade or Business (SSTB)
A specified service trade or business is where the reputation or skill of its employees is the main reason customers choose it. Examples include:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Investing/investment management
- Trading/dealing in securities
- And any business where the principal asset is the reputation or skill of owners/employees
When you own an SSTB and your taxable income exceeds the income threshold, your QBI deduction begins to phase out. When it hits the top of the phase-out range, your QBI deduction becomes $0. This phase-out limit also changes each year so check with the IRS for the current year’s numbers.
W-2 Wage and Property Limitation
The W-2 and property limitation says once your income exceeds the threshold, your QBI deduction cannot exceed the greater of either:
- 50% of the W-2 wages paid by your business.
- 25% of the W-2 wages paid by your business + 2.5% of the initial cost of your business’s long-term property like buildings and equipment.
If your W-2 wages paid were $500,000 and you have $3,000,000 in long-term assets, you would calculate the QBI as:
- 50% of W-2 = 50% x $500,000 = $250,000
- 50% of W-2 + 2.5% of property = $250,000 + 2.5% x $3,000,000 = $325,000
- Take the greater of the two options.
In this case, your QBI deduction would be $325K. And at a 30% effective rate, you save $97,500 in taxes.
Home Office Deduction
The Home Office Deduction from IRS Publication 587 gives you a deduction based on the portion of your home that you use exclusively and regularly for business. The portion includes utilities as well as rent/mortgage.
You likely qualify for the home office deduction when:
- You are self-employed (freelancer, independent contractor, small business owner).
- The specific area of your home is used exclusively for conducting business.
- That area is regularly your place of business instead of going elsewhere, like to an office.
You likely don’t qualify when:
- The space is used for both business and personal activities (e.g., an office that is also a guest room).
- You occasionally use the space for business.
- You’re a W-2 employee.
How to Calculate the Home Office Deduction
There are two ways to calculate the home office deduction, including:
- Simplified method
- Actual expense method
If you pay $24,000 annually in rent, insurance, utilities, etc. for a 2,000-square-foot apartment and have a 200-square-foot home office, here is how to calculate the result with the simplified method.
The simplified method multiplies the IRS standard rate by the square feet of your office up to a max of 300 sqft. Your deduction would be:
- 200 x $5 = $1,000
The actual expense method uses a 2-step process to find the percentage of your property times the total annual cost:
- 200 / 2,000 = 10%
- 10% x $24,000 = $2,400
In this case, the actual expense method has a larger result and saves you $720 in taxes with a 30% effective tax rate.
Note: Employees (W-2) generally can’t claim the federal home-office deduction for 2018–2025 under the TCJA suspension.
Business Use of a Vehicle
The business vehicle deduction from IRS Publication 463 turns everyday business tasks like driving to client meetings and picking up supplies for your office party into direct tax savings. Use the vehicle deduction when you:
- Are self-employed and use your personal vehicle for business activities.
- Have a detailed date, time, and mileage log of your vehicle usage for business purposes.
- Have receipts and records for all car expenses and use the actual expense method.
Business Vehicle Deduction Calculation
There are two methods to calculate the business vehicle tax deduction.
- Standard mileage rate
- Actual expenses method (must have detailed expense records)
If your total expenses were $8,000 and 7K of the 10K miles you drove last year were for business, the standard mileage rate uses the rate per mile from the IRS times the number of business miles:
- $0.70 x 7,000 = $4,900.
The actual expense method uses a 2-step process:
- Get the percentage of business miles = 7,000 / 10,000 = 70%
- Multiply by your total costs = 70% x $8,000 = $5,600.
The actual expense method is higher and saves you more.
Startup and Organizational Costs
The startup and organizational costs deduction from IRS publication 583 lets you deduct up to $5,000 for startup costs and another $5,000 for organizational costs when launching your business.
Costs need to have occurred before your first day in business and be directly related to starting the business. Examples for each type of cost include:
| Startup costs | Organizational costs |
| Market research Advertising Labor and rent | Legal fees Accounting costs Regulatory expenses |
When you spend over $50,000 in either category, the deduction begins to phase out. The deduction phases out completely if you spend over $55,000 in either category (not combined).
How the Startup Cost Deduction Works
The startup cost deduction works by letting you deduct up to $10,000 total in year one ($5,000 startup + $5,000 organizational) and amortizing the remaining costs over 15 years, beginning with the month the active trade or business begins.
Here’s the calculation if you spent $15,000 on startup costs and $2,700 in organizational costs before your business opened:
- Year one deduction:
- $5,000 startup + $2,700 organizational = $7,700
- Remaining startup costs above the $5,000 cap = $10,000
- Amortize over 15 years = $10,000 / 15 = $667 per year
Your total deduction in the first year is the flat $7,700 from step 1 plus $667 from step 3 for a total of $8,367. That would save you $2,510 in taxes at a 30% rate.
Section 179 and Bonus Depreciation
Section 179 and bonus depreciation both give you major tax savings. Section 179 lets you deduct up to 100% of a qualifying asset’s purchase price in the year you start using it. This fully depreciates the asset, so you don’t have to worry about depreciation in future years. Bonus depreciation lets you deduct 40% for property placed in service in tax years beginning in 2025.
Pro-tip: Some states don’t conform to Section 179 and/or bonus depreciation. Check with your local tax professional.
Both Section 179 and bonus depreciation apply to new and used property that you just started using. While both can give you a large deduction, there are differences between them that you should know. Plus, there are ways to use them together in your tax plan. This is why having an overview of Section 179 helps before deciding.
Section 179 Overview
Section 179 works by letting you choose to deduct between 1% and 100% of an asset’s purchase price in the year you start using it for your business. If you deduct less than 100%, you depreciate the remaining amount with another method from IRS publication 946.
This deduction applies to multiple investments that a small business owner can make, but some purchases like land, buildings, or a new parking lot won’t qualify. Check publication 946 if you’re unsure about your asset.
There are also limits in place to keep it as a benefit for small businesses instead of large corporations. Here’s how:
- There’s a maximum deduction cap that changes yearly, so check with the IRS for current limits.
- There’s a limit on the total value of all property that qualifies for 179. If you buy more than this amount, the deduction phases out and eventually becomes $0.
- You’re not able to deduct more than your total pre-tax income to create a net loss, but you can carry forward the unused portion.
- Vehicles weighing under 6,000 pounds and those between 6,000 and 14,000 pounds have separate deduction limits that change each year. Vehicles that weigh more than 14,000 pounds don’t have a specific limit.
- 2025 Section 179 limits: $1,250,000 max; phase-out begins at $3,130,000; SUV cap $31,300.
For most business assets, Section 179 lets you choose between a large deduction (100% of purchase price) or something smaller to fit your exact tax deduction goals. If you choose less than 100%, you depreciate the remaining amount with another method. The default method for many assets is bonus depreciation.
Bonus Depreciation Overview
Bonus depreciation is the default depreciation method for most business assets, and you have to opt-out of it on purpose to use another depreciation method.
When you opt-out of bonus depreciation, you can’t use it for other assets you started using that year that are in the same property class (from tables B-1 or B-2 in publication 946). This means if you buy a fleet of cars, you have to use bonus depreciation on all or none of them.
Assets that don’t qualify for bonus depreciation include:
- Land
- Buildings used as admin space
- A new roof for your headquarters
- Qualified Improvement Property (QIP) to the interior of nonresidential buildings is bonus-eligible;
Check publication 946 to see if your specific assets are eligible.
Unlike Section 179, bonus depreciation allows you to create a net loss on your income statement when the deduction is larger than your pre-tax income. This means you’d pay no federal business income taxes for the year, and you’re allowed to carry forward the loss.
Note: Property acquired after January 19, 2025 is eligible for a 100% bonus depreciation deduction. This permanently reverses the phasedown schedule that would have otherwise reduced the deduction to 40% for the 2025 tax year. However, property acquired between January 1 and January 19, 2025 is subject to the pre-OBBBA rules and only qualifies for a 40% bonus depreciation.
These are five tax deductions for small business owners that can help you lower your tax bill when they apply to your business. When you’re ready to combine tax savings with a small business loan to speed up your growth, take a look at the different types of loans we offer.
QuickBridge does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
