Business income deductions are the largest single lever an owner has on the family return. The list below assumes you already run the entity properly — see chapter “The Business Owner’s Tax Architecture” for entity selection and operational hygiene; this section catalogs the deductions themselves. Rules vary by entity type (sole proprietor, partnership, S-corp, C-corp, LLC), and a deduction that flows through a pass-through to the owner’s 1040 is not the same as one that reduces a C-corp’s separately computed liability. Coordinate with the entity chapter and with a tax professional before claiming anything on this list.
You can deduct up to $5,000 in startup costs and $5,000 in organizational costs in the first year of business IRC §195, “Start-up expenditures”. Any remaining costs must be amortized over 15 years. These costs include market research, advertising, and legal fees for setting up the business.
IRC §162 allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. This includes salaries, rent, utilities, and other operational costs.
Inventory costs are deductible as part of the cost of goods sold (COGS). This includes raw materials, labor, and overhead costs directly associated with production ( IRS Pub. 538, “Accounting Periods and Methods”). Proper inventory accounting methods, such as FIFO or LIFO, can optimize tax outcomes.
Utility expenses, including electricity, water, and internet services, are fully deductible as ordinary and necessary business expenses ( IRS Pub. 334). Keep detailed records of all utility bills to substantiate these deductions.
Premiums for business-related insurance policies, such as liability, property, and workers’ compensation insurance, are deductible ( IRS Pub. 334). Health insurance premiums for employees are also deductible and may qualify for additional tax credits.
Rent paid for business property is deductible. If you use part of your home for business, you may qualify for a home office deduction ( IRS Pub. 587, “Business Use of Your Home”). The deduction is calculated based on the proportion of your home used exclusively for business.
You can deduct auto expenses using either the standard mileage rate or actual expenses ( IRS Pub. 463, “Travel, Gift, and Car Expenses”). The standard mileage rate for 2025 is 70 cents per mile. Actual expenses include gas, maintenance, insurance, and depreciation.
Rent paid for machinery and equipment is deductible. Additionally, you can depreciate the cost of purchased machinery over its useful life using the Modified Accelerated Cost Recovery System (MACRS) covered by IRC §168, “Accelerated Cost Recovery System”( IRS Pub. 946, “How to Depreciate Property”). You can immediately expense up to $2,500,000 of qualifying property under IRC §179 (the higher limit OBBBA set starting in 2025). Bonus depreciation, which OBBBA permanently restored to 100% for property acquired after January 19, 2025, allows full expensing of new and used property.
Fees paid to attorneys, accountants, and consultants for business-related services are deductible. These expenses must be directly related to your business operations ( IRS Pub. 334).
Payments to independent contractors for services rendered are deductible. Ensure you issue Form 1099-NEC to contractors who receive $600 or more in a year ( IRS Pub. 15).
Interest paid on business loans is deductible, provided the loan proceeds are used for business purposes ( IRS Pub. 334). Keep detailed records of loan agreements and interest payments.
Small businesses with fewer than 50 full-time employees can offer QSEHRA to reimburse employees for medical expenses. Contributions are deductible, and employees can exclude reimbursements from their taxable income ( IRC §9831, “General exceptions”).
Businesses investing in innovation can claim the R&D tax credit, reducing their tax liability dollar-for-dollar ( IRC §41, “Credit for increasing research activities” and IRC §174, “Amortization of Research and Experimental Expenditures”). Note, OBBBA restored immediate expensing of domestic research and experimental expenditures ( IRC §174A) for tax years beginning after 2024, reversing the earlier rule that required five-year amortization. Research conducted outside the United States must still be amortized over fifteen years.
IRC §199A provides a deduction of up to 20% of qualified business income (QBI) for pass-through entities such as S corporations, partnerships, and sole proprietorships. There are income thresholds and limitations based on the type of business; section “The Qualified Business Income Deduction” covers the SSTB rules and the wage and property limits in detail.
If you are self-employed and not eligible for employer-subsidized coverage — including through a spouse’s plan — you may deduct 100% of the premiums paid for health, dental, and qualifying long-term-care insurance for yourself, your spouse, and your dependents ( IRC §162(l), “Health insurance costs of self-employed individuals”). This is an above-the-line deduction, available whether or not you itemize, but it cannot exceed your net self-employment income.
Meals with a clear business purpose — while traveling for business, or with a client — are 50% deductible ( IRC §274, “Disallowance of certain entertainment, amusement, or recreation expenses”). Entertainment expenses remain nondeductible after the 2017 TCJA. Record the amount, date, place, and business purpose of each.
Courses, seminars, workshops, books, and related travel that maintain or improve skills required in your current business are deductible. Education that qualifies you for a new trade or business is not.
A business may deduct a debt that becomes worthless during the year — an uncollectible customer receivable, for example — provided the amount was previously included in income ( IRC §166, “Bad debts”).
Rather than capitalizing and depreciating low-cost equipment, you may elect the de minimis safe harbor and immediately expense items costing up to $2,500 each ( Treas. Reg. §1.263(a)-1, “De minimis safe harbor election”). The election is made annually under a consistent written accounting policy.
Contributions toward employees’ health coverage, retirement plans, and education assistance are deductible. A small employer that newly establishes a retirement plan may also claim the start-up credit under IRC §45E, “Small employer pension plan start-up costs”, which the SECURE 2.0 Act expanded to cover up to 100% of start-up costs for the smallest employers.
IRC §280A allows for the deduction of expenses related to the business use of your home, provided the space is used exclusively and regularly for business purposes.
IRC §170 allows businesses to deduct charitable contributions made to qualifying organizations, subject to certain limitations.
The discipline is contemporaneous documentation. Every deduction above survives audit only if you can produce the underlying record (receipt, mileage log, expense report, contract, board minutes) when asked, often years later. Build the file as the year runs; reconstructing it from memory in October before an examination closes is the most common reason otherwise-legitimate deductions are disallowed.
Net operating losses. Track your NOL personally and plan to use it across multiple profitable years, not in the first one. When a business’s deductions exceed its income, the excess is a net operating loss under IRC §172, “Net operating loss deduction”, and post-TCJA the NOL carries forward indefinitely but is capped at 80% of the absorbing year’s taxable income. The practical consequence: a business with a large loss followed by a strong year still pays tax on 20% of the strong year’s income, so plan to recover the rest over the following years rather than expecting a single-year wipe-out. Pass-through NOLs travel with the taxpayer, not the entity, which means an LLC’s loss attaches to your 1040 and can offset income from a separate flow-through entity you own. Carryback is no longer available except for narrow farming and insurance carve-outs — the timing decision is purely forward. Layer the IRC §461, “Limitation on losses, deductions and credits”(l) excess-business-loss cap on top: for non-corporate taxpayers, current-year business losses that offset non-business income are limited annually (roughly $610,000 single / $1,220,000 MFJ for 2026, indexed), with the disallowed slice rolling into the NOL carryforward instead of disappearing. Document the NOL balance on every return; the IRS will not reconstruct it for you.
Conservation easements: do not. A taxpayer who donates a permanent conservation easement on real property may claim a charitable deduction equal to the appraised reduction in the property’s value ( IRC §170(h), “Qualified conservation contribution”). In its legitimate form — a landowner protecting a family farm or a historic facade — the provision is uncontroversial. The syndicated conservation easement, however — where promoters package a property purchase, an inflated appraisal, and a pre-arranged easement so that a passive investor receives a multiple of their cash investment as a charitable deduction — has been a designated “listed transaction” since 2016 and was further restricted by the SECURE 2.0 Act, which generally disallows the deduction where it exceeds 2.5 times the partner’s basis. The IRS has prevailed in nearly every litigated case, the Tax Court has imposed gross-valuation-misstatement penalties, and the Department of Justice has prosecuted the largest promoters. The expected value of participation in a syndicated easement is materially negative on a risk-adjusted basis; the deduction will be disallowed, the penalties will be assessed, and the legal cost of defending the position will exceed any conceivable benefit. Decline the pitch.