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Small business tax deductions are the costs of running your business that you subtract from business income before tax is figured. Most owners worry about two things: missing a deduction they were entitled to, and claiming one the IRS later questions. A clear list and good records handle both worries.

This guide sorts deductions by category and shows the 2026 limits after the One Big Beautiful Bill Act. We wrote it for owners across Northwest Indiana, so it also covers where Indiana differs from federal law.

Quick Summary

Small business tax deductions are ordinary and necessary costs of running your business, such as rent, supplies, advertising, insurance, wages, software, and business use of a vehicle or home. You subtract them from business income to find your taxable profit. Some are limited, such as meals at 50% and gifts at $25 per person, and some are not deductible at all, such as fines and personal costs.

• Everyday costs: rent, utilities, advertising, supplies, software, insurance, and professional fees are generally deductible.
• Special rules: the home office, vehicle, meals, and travel have their own tests and limits.
• Big purchases: equipment can often be deducted in the first year, but Indiana treats Section 179 and bonus depreciation differently from federal law.
• Owner-level deductions: the QBI deduction, self-employed health insurance, and retirement contributions are claimed on your personal return.
• Records: a deduction you cannot prove may be lost, so keep receipts, mileage logs, and a note of the business purpose.

Quick rule of thumb: if a stranger could read your receipt and note and see why the business needed the expense, it is likely sound. If you need “sort of” to explain it, check with a CPA first.

What Can a Small Business Write Off?

A small business can write off costs that are ordinary and necessary for earning business income. Ordinary means common in your type of business, and necessary means helpful and appropriate. Many owners call these tax write offs. They reduce your taxable profit, not your tax bill dollar for dollar.

A deduction lowers the income your tax is based on, while a credit lowers the tax itself. Sole proprietors and most single-member LLCs report deductions on Schedule C, while partnerships and S corporations pass results to owners, so tax deductions for an LLC depend on how the LLC is taxed.

Business deductions are separate from the standard or itemized choice on your personal return, covered in our standard vs itemized deduction guide.

Before you claim anything, ask five questions:

• Is it ordinary for my business?
• Is it necessary?
• Is the amount reasonable?
• Is it free of personal use?
• Can I prove it?

This table lists small business tax deductions by category with the 2026 rule to watch.

What Everyday Business Expenses Can You Deduct?

Most everyday costs of running a business are deductible when they are ordinary, necessary, and for the business only. Common examples are rent, utilities, advertising, supplies, software, business insurance, interest on business loans, bank fees, licenses, and professional fees. If a cost has both business and personal use, you deduct only the business share.

• Rent and utilities for an office, shop, or storefront.
• Advertising, including your website, online ads, and signs.
• Supplies and software you use in the business.
• Insurance, interest, and bank fees on business policies, loans, and accounts.
• Professional fees for accounting, legal help, and the business part of tax preparation.
• Licenses, education, and business property tax on equipment.

Inventory you sell is handled as cost of goods sold, a separate calculation your CPA can set up.

Can you deduct your phone bill as a business expense?

Yes, but only the business-use share. Estimate the percentage from a sample of calls and data use, and keep that note. A phone used only for business is fully deductible. Internet works the same way.

What is the difference between a repair and an improvement?

A repair keeps property in working order and is deductible when paid. An improvement makes property better or adapts it to a new use, so it is depreciated, meaning its cost is spread over its useful life. With the de minimis safe harbor election, you can deduct tangible property up to $2,500 per item or invoice when you have no applicable financial statement.

Can You Deduct a Home Office?

Yes, if part of your home is used regularly and exclusively as your principal place of business or to meet clients. You can deduct a share of actual home costs, or use the simplified method of $5 per square foot, up to 300 square feet, which tops out at $1,500.

• Regular and exclusive use: a room, or a clearly defined part of one, used only for the business. A kitchen table that also serves dinner does not qualify.
• Principal place of business: your home is where you do administrative work such as billing and bookkeeping, and you have no other fixed location for it. A separate studio or garage used exclusively for the business can also qualify.

The actual method applies the business percentage of your home to utilities, insurance, repairs, and depreciation, and self-employed owners use Form 8829. The simplified method skips that math but allows no actual home expenses or depreciation. Employees, including owners paid as employees of their own corporation, generally cannot claim unreimbursed home office costs. Depreciation can also affect the tax when you sell, as our guide to capital gains tax on a home sale explains.

How Do Vehicle Deductions Work?

You can deduct vehicle costs with either the standard mileage rate or actual expenses. For 2026 the business rate is 72.5 cents per mile before July 1 and 76 cents per mile from July 1 on, after the IRS raised it for higher fuel prices. Commuting from home to your regular workplace is not deductible.

• Standard mileage: multiply business miles by the rate, then add business parking and tolls. For a vehicle you own, you generally must choose this method in the first year of business use.
• Actual expenses: deduct the business share of gas, repairs, insurance, lease payments, and depreciation.

Trips from your office to a client or job site count; home to a regular workplace does not. Keep a written log of date, destination, purpose, and miles, split at July 1 for 2026. A phone app counts. The Section 179 amount for a sport utility vehicle is capped at $32,000 for 2026, so ask before you buy.

How Much of Meals, Travel, and Gifts Can You Deduct?

Business meals are generally 50% deductible when they are not lavish and have a clear business purpose. Entertainment, such as game tickets, is not deductible. Overnight business travel is deductible, including lodging and transportation. Business gifts are limited to $25 per person per year.

• Meals: deduct 50% of actual cost, or of the standard meal allowance while traveling. Lavish or extravagant meals are not deductible.
• Entertainment: not deductible, though a meal billed separately from the event may count at 50%.
• Travel: the trip must be overnight or long enough to need sleep or rest. Allocate costs if you add vacation days.
• Gifts: $25 per recipient per year, not counting packaging and shipping.

How Do Equipment, Section 179, and Bonus Depreciation Work in 2026?

Business equipment usually must be depreciated over several years, but two tools can speed that up. Section 179 lets you expense up to $2,560,000 of qualifying property in 2026, and 100% bonus depreciation applies to qualified property acquired after January 19, 2025. Indiana follows neither in full, so your state return needs adjustments.

• Section 179: you elect to deduct qualifying equipment in the year you place it in service. The limit shrinks once total Section 179 property passes $4,090,000, and the deduction cannot exceed taxable income from your active business.
• Bonus depreciation: the One Big Beautiful Bill Act made the 100% first-year deduction permanent. Both go on Form 4562.

How does Indiana treat Section 179 and bonus depreciation?

Indiana Department of Revenue Information Bulletin 118, updated in May 2026, says Indiana caps its Section 179 allowance at $25,000 and requires an add-back of the federal amount above that. It also requires an add-back of federal bonus depreciation. In later years you deduct the regular depreciation Indiana would have allowed, so the gap reverses.

A large purchase can therefore create a big federal deduction and a smaller Indiana one in year one. Equipment can also trigger Indiana business personal property tax duties, covered in our Indiana business personal property tax guide. For the federal side, see our summary of the One Big Beautiful Bill Act.

Can You Deduct Wages and Contractor Payments?

Yes. Reasonable wages, the employer share of payroll taxes, and benefits you provide are generally deductible, and so are payments to independent contractors. For payments made in 2026, you generally file Form 1099-NEC when you pay a contractor $2,000 or more, up from $600.

• Contractors: collect a Form W-9 first. Payments under $2,000 are still deductible.
• Your own pay: a sole proprietor or partner does not deduct a salary to themselves. An owner working in an S corporation is an employee and should be paid through payroll.

Classifying workers correctly matters because payroll tax duties differ. Our payroll services handle filings and year-end forms.

Are Health Insurance and Retirement Plans Deductible?

Often yes, and both are claimed on the owner’s personal return. A self-employed owner can deduct health, dental, vision, and qualified long-term care premiums up to the business’s net profit, except for months they could join an employer-subsidized plan. Retirement contributions are deductible within limits.

• Health insurance: covers you, a spouse, dependents, and a child under 27, under a plan established by your business. For a more-than-2% S corporation shareholder, premiums run through W-2 wages first. Form 7206 may be needed.
• SEP IRA: up to 25% of an employee’s pay, or 20% of net earnings for a self-employed owner, capped at $72,000 for 2026. You can generally contribute by your return due date, including extensions.
• SIMPLE IRA: $17,000 employee deferral limit for 2026.
• 401(k): $24,500 employee deferral limit, plus $8,000 catch-up at age 50 and older.
• Half of self-employment tax: deductible on Form 1040 for sole proprietors and partners.

What Start-Up Costs Can You Deduct Before You Open?

Many owners can deduct up to $5,000 of start-up costs and up to $5,000 of organizational costs in the year the business begins. Each amount is reduced by the amount your total costs exceed $50,000, and the rest is amortized over time. Equipment is depreciated instead.

Start-up costs include market research, pre-opening advertising, and training. Organizational costs are what you spend to form the entity, such as legal fees. Our start-up services cover entity selection and bookkeeping setup.

What Is the Qualified Business Income Deduction?

The qualified business income (QBI) deduction lets many owners of sole proprietorships, partnerships, and S corporations deduct up to 20% of qualified business income. The One Big Beautiful Bill Act made it permanent. It reduces taxable income, not adjusted gross income, and does not apply to C corporation income or employee wages.

• 2026 thresholds: wage and property limits start above $201,750 of taxable income for single filers and $403,500 for joint filers. The phase-in range is now $75,000 single and $150,000 joint.
• Service businesses: fields such as health, law, accounting, and consulting face a phase-out above the threshold.
• Minimum: from 2026, owners with $1,000 or more of active qualified income can claim at least $400.

It is figured on Form 8995 or Form 8995-A, starting from net QBI after your business deductions.

What Does a Real Set of Business Deductions Look Like?

Here is an example with round numbers showing how a sole proprietor’s spending becomes deductions on Schedule C. Percentage rules, per-mile rates, and flat rates change the amount you can deduct. The figures are made up and do not describe any real business.

Health insurance, retirement contributions, half of self-employment tax, and the QBI deduction come after Schedule C, so they lower taxable income without changing the $108,660. Indiana taxes that profit at 2.95% for 2026, and many counties add county income tax, so each valid deduction reduces both bases.

What Business Expenses Can’t You Deduct?

You generally cannot deduct personal, living, and family expenses, entertainment, fines paid to a government, bribes, political contributions, lobbying costs, club dues, and commuting. Property improvements are depreciated, not expensed. The table shows how common items are treated in practice.

What if your business loses money every year?

If you do not carry on an activity to make a profit, deductions are limited and the loss generally cannot offset other income. The IRS presumes a for-profit activity if it earned a profit in at least three of the last five years.

Which Business Deductions Draw the Most Questions From the IRS?

The IRS does not publish a list of audit triggers. It says returns are chosen by random selection, computer screening against norms for similar returns, and related examinations of other taxpayers. A deduction that looks out of line with similar businesses, or that you cannot document, is the one most likely to be questioned. Double-check these before you file:

• Home office: confirm exclusive use and measure the space.
• Vehicle: every mile claimed as business, with no log, is hard to defend.
• Meals and travel: large totals need a client, purpose, and receipt.
• Round numbers: many even amounts look like estimates.
• Repeated losses: they invite hobby questions.
• Income mismatch: Form 1099-NEC amounts also go to the IRS, so match them.

If an IRS letter questions a deduction, gather your records and call your CPA before you respond.

How Should You Keep Records for Business Deductions?

Keep a record for every deduction showing amount, date, place, and business purpose, plus the receipt or statement behind it. The IRS generally requires documentary evidence, but not for expenses under $75 other than lodging, so log those too. Use a separate business bank account and card.

• Receipts and statements: scan them the day you get them, with a note on why.
• Mileage log: date, destination, purpose, and miles, split at July 1 for 2026.
• Home office and assets: square footage, photos, and purchase and in-service dates.
• Worker forms: W-9s, W-2s, and 1099-NECs.

For travel, meals, gifts, and vehicles, estimates are not enough. To learn how long to keep each record, see our record retention guide. If bookkeeping is a struggle, our comparison of outsourced accounting vs an in-house accountant can help.

How Can a CPA Help You Find the Right Deductions?

A CPA can match the rules to your entity, set up records that support each deduction, and review choices that interact, such as Section 179, QBI, retirement plans, and Indiana adjustments. McMahon & Associates CPAs has served Northwest Indiana from Munster, Indiana, since 1971.

• Timing: when to buy equipment or fund a retirement plan.
• Indiana planning: state add-backs, and whether the Indiana pass-through entity tax election, described on our page on new tax law impacting Indiana businesses, fits you.
• Cleanup: reviewing prior returns for missed deductions.

Our tax services include planning and preparation for sole proprietors, LLCs, partnerships, and corporations. Comparing firms? Read how to choose a CPA in Northwest Indiana, and use our tax preparation checklist to see what to bring.

Frequently Asked Questions

What can I write off for my small business?

You can write off ordinary and necessary business costs, such as rent, supplies, advertising, software, insurance, professional fees, wages, contractors, business mileage, and a qualifying home office. Personal costs cannot be written off.

What business expenses are tax deductible?

An expense is deductible when it is ordinary, necessary, reasonable, paid in the tax year, and used for the business. Meals are limited to 50%, gifts to $25 per person, and entertainment is not deductible.

What are common tax deductions for small businesses?

Common ones include rent, advertising, insurance, wages, contract labor, professional fees, vehicle and home office costs, and depreciation. Owners also claim QBI, health insurance, and retirement contributions on the personal return.

Can I deduct my phone bill as a business expense?

Yes, for the business-use share. Estimate the percentage and keep a note of how you figured it. A phone used only for business is fully deductible.

How do I keep records for business deductions?

Keep the receipt or statement and note the date, amount, place, and business purpose. Use a separate business account and keep a written mileage log.

Do tax deductions for an LLC differ from a sole proprietor’s?

Not usually. A single-member LLC is generally disregarded for income tax, so the owner reports the same deductions on Schedule C. A multi-member LLC is generally taxed as a partnership unless it elects otherwise.

Is there a limit on how much a small business can write off?

There is no single cap on ordinary and necessary expenses, but many items have limits, such as meals at 50% and Section 179 at $2,560,000 for 2026. Losses are also limited: the 2026 excess business loss limit is $256,000 for single filers and $512,000 for joint filers.

Does Indiana allow the same business deductions as federal law?

Mostly. Indiana starts from your federal adjusted gross income, then requires add-backs, including federal bonus depreciation and Section 179 above $25,000. The state rate is 2.95% for 2026, and county tax may apply.

What Is the Next Step?

You can also learn more about our tax services.

About the Author

McMahon & Associates CPAs is a locally owned accounting firm at 10010 Calumet Avenue, Munster, Indiana 46321. The firm was established in 1971 and serves Northwest Indiana and Chicago’s South Suburbs. Our team provides accounting and bookkeeping, payroll, tax, consulting, and audit services to businesses and individuals. Call 219.924.3450 or visit our team page to meet the people behind the work.