Essentially, a tax deduction is an expense that you can subtract from your taxable income, which in turn reduces the amount of taxes you owe. By knowing and using these deductions, small business owners like you can save money which can be reinvested back into your business for growth opportunities.
Tax deductions: what do they mean?
Tax deductions are like discounts offered by the government to small business owners, allowing them to subtract certain expenses from their taxable income.
Well, think of it as a way to lower the amount of money the taxman takes from your pocket.
However, not all expenses can be claimed as deductions; they have to meet certain criteria set by the IRS.
Let’s explore some common deductions available to self-employed people running businesses as sole proprietorships or partnerships. Some of these deductions are directly related to business operations, while others might seem more personal but can still make a difference for small business owners come tax time.
Maximizing your use of tax deductions can put a lot more money back in your pocket during tax season—potentially saving you a bundle.
Let’s illustrate with a scenario.
Tax deductions explained with an example
Consider the case of Alex, the owner of a small marketing consultancy. Last year, Alex’s business generated $80,000 in revenue. With self-employment taxes at 15.3% and income tax based on individual tax brackets, Alex faced a total tax liability of $16,240.
(For simplicity, let’s assume Alex is single with no dependents and no other taxable income.)
In the beginning of the tax year, Alex enlisted the services of an experienced accountant who uncovered $10,000 in deductible business expenses that had not been accounted for. These expenses included software subscriptions, marketing materials, and professional development courses, all essential for running the consultancy.
By deducting these business expenses, Alex was able to reduce the taxable income of the business to $70,000. This adjustment resulted in self-employment taxes of $10,710 and income tax of $5,000, totaling $15,710.
Thanks to the additional deductions, Alex managed to lower the tax bill by over $500!
Identifying and claiming the $10,000 in deductible business expenses allowed Alex to decrease the tax burden by more than $500—an amount that could be reinvested back into the business for growth opportunities or used for personal expenses.
By leveraging all available deductions, small business owners like Alex can optimize their tax situation, keeping more of their hard-earned money in their pockets.
Keeping track of your deductions
Consistent bookkeeping is key to accurately tallying up your deductions. Yet, keeping track of which deductions apply to your situation can be challenging for small business owners.
Many individuals find it hard to stay organized with their deductions throughout the year, often scrambling to piece everything together at the end of the year, which can lead to missed opportunities. That restaurant expense from January last year, for instance? It’s easy to forget, but failing to record it means missing out on potential tax savings.
This is where effective bookkeeping practices become essential.
To ensure you can claim these deductions, it is crucial to maintain accurate records and keep up with your monthly bookkeeping tasks. But if you’re juggling day-to-day financial operations on the side, you won’t have much time and energy left for your core responsibilities as a business owner.
To your delight, CoCountant is committed to simplifying financial operations for startups and small businesses. With us managing your books, we identify these deductions on a monthly basis, providing you with the confidence that you’ve captured every eligible expense and minimized your tax liability.
Then, when tax season rolls around, simply provide our records to your CPA or take advantage of our tax advisory and filing services to get the job done.
18 big tax deductions to keep your eyes on in 2025
1. Advertising and promotion
When it comes to advertising and promotion, all the expenses are fully deductible.
This includes:
- Hiring someone to create a business logo
- Printing business cards or brochures
- Buying ad space in newspapers or online
- Sending out cards to clients
- Launching a new website
- Running ads on social media
- Sponsoring an event.
But there’s a catch: you can’t deduct money spent on things like trying to influence laws (that’s lobbying) or supporting political campaigns or events.
2. Bank fees
Setting up separate bank accounts and credit cards for your business is highly advisable. Any of the following fees incurred from your business bank accounts or credit cards are eligible for deduction:
- Annual or monthly service charges
- Transfer fees
- Overdraft fees
- Merchant fees
- Transaction fees paid to third-party processors like PayPal or Stripe
However, it’s important to note that fees related to your personal bank accounts or credit cards cannot be deducted.
3. Business meals deductions
You can typically deduct 50% of qualifying food and beverage expenses. To qualify for the deduction:
- The expense must be a normal and necessary aspect of conducting your business.
- The meal should not be excessively extravagant given the circumstances.
- Either the business owner or an employee must be present during the meal.
You can fully deduct the cost of providing meals to employees, such as ordering pizza for dinner during late work sessions. Meals offered at office gatherings and picnics are also 100% deductible.
Note: Remember to maintain documentation for the outing, including the amount spent, the date and location of the meal, and the business relationship of the individuals present.
An easy way is to note the purpose of the meal and the topics discussed on the back of the receipt.
4. Business insurance deductions
Deducting your business insurance premiums can offer significant benefits for your business finances. These premiums encompass various types of coverage, included but not limited to:
- Liability coverage
- Workers’ compensation coverage
- Auto insurance for business vehicles
- Professional liability or malpractice insurance
- Property coverage for furniture, equipment, and buildings
- Group health, dental, and vision insurance for employees
- Business interruption insurance for lost profits due to unforeseen circumstances
- Life insurance for employees, provided that neither the business nor its owner is listed as a beneficiary on the policy.
5. Vehicles used for business
Dedicating a vehicle to your business functions may feel like an added expense, but there’s some good news. If you use it for work purposes, you can deduct all the incurred expenses. However, there’s one thing to be mindful of: if your car is used for both business and personal reasons, you can only deduct the business-related expenses.
You can use one of the following methods for deducting the vehicle costs, depending on what safeguards your interests the best:
Standard mileage rate: Multiply your business miles by the IRS standard mileage rate[1], which changes annually. For 2025, the rate is 70 cents per mile, up 3 cents from 67 cents in 2024.
Actual expense method: Track all vehicle-related costs for the year, including gas, repairs, insurance, and registration fees. Multiply these expenses by the percentage of miles driven for business.
To follow either approach, you need to monitor your business-related miles throughout the year.
You have a few options for tracking these miles: you can maintain a thorough record, use a mileage tracking app[2], or create your mileage log using alternative documents like calendars or appointment books. If you opt for a mileage log, make sure to clearly note the miles traveled, time and location, and the purpose of your business trip.
Remember, miles driven during your regular commute from home to work and back are not considered for deduction as they’re considered personal commuting expenses.
6. Contract labor
Bringing on freelancers or independent contractors can be a smart strategy for cutting down your business expenses, especially for short-term projects. When you hire them, you can deduct their fees as a business expense.
However, make sure to provide them with a Form 1099-NEC[3] by January 31st of the following year if they get paid $600 or more during the tax year.
7. Depreciation
Depreciation is a way of spreading out the cost of your business assets over their useful lifespan, rather than deducting the entire cost all at once when you purchase them.
While expensing assets upfront may seem appealing due to the immediate tax benefits, the IRS [4]offers alternative methods to write off the full cost in a single year.
Here are a few options:
Section 179 deduction: This allows business owners to deduct up to $1,080,000[5] of property placed in service during the tax year, including new and used business property and off-the-shelf software. However, the deduction is limited to the business’s taxable income, with any unused portion carried forward to the next year.
De minimis safe harbor election: Small businesses can choose to expense assets costing less than $2,500[6] each in the year they’re bought.
Bonus depreciation: Businesses can deduct 100% of the cost[7] of certain assets like machinery, equipment, computers, appliances, and furniture.
If you bought a new vehicle during the tax year, note that the IRS limits deductions[8] for passenger vehicles. Without claiming bonus depreciation, the maximum deduction in the first year is $10,100, and with bonus depreciation, it’s $18,100.
Depreciation can be a complex concept, especially if you’re not well-versed in financial matters. That’s why it’s recommended to speak to a financial expert and seek tailored advice on which assets you can deduct for your business.
You may find it helpful to read this blog to get a better understanding of the topic: What is depreciation? And how to calculate it?
8. Education
When it comes to education costs, you can deduct them fully if they enhance your business skills and knowledge. To see if a class or workshop qualifies, the IRS[9] checks if it helps maintain or improve skills needed for your current business.
Here are examples of valid business education expenses:
- Seminars and webinars
- Books relevant to your industry
- Classes to boost skills in your field
- Subscriptions to industry publications
- Travel costs to and from classes
- Workshops to enhance your expertise
Remember, education costs that qualify you for a new career or are unrelated to your business don’t count as tax deductions.
9. Home office expenses
If you use a home office for your business, you might be eligible to deduct part of your housing expenses from your business income.
There are two ways to do this:
Simplified method: Deduct $5 per square foot of your home used for business, up to 300 square feet.
Standard method: Monitor all real costs associated with running your household, including mortgage interest or rent, utilities, property taxes, cleaning and yard services, HOA fees, and repairs. Then, calculate the portion of these expenses corresponding to the percentage of your home used for business purposes.
If you operate from home, you must meet two criteria to qualify:
Regular and exclusive use: Your home office must be used regularly and exclusively for business activities. For instance, if your office space doubles as a guest room or a recreational area, it wouldn’t meet the criteria for exclusive business use. Your workspace should have clear boundaries, and it’s a good idea to keep photos as evidence.
Principal place of business: Your home office must be where you spend the most time and conduct important business activities.
If you use the standard method, you’ll need to file Form 8829[10] along with your Schedule C.
10. Interest
If you use a loan or credit card to cover business expenses, you can deduct the interest paid to your lender or credit card company, provided you meet these conditions:
You are legally responsible for the debt
Suppose you borrow funds from a friend to kickstart your business, but you’re not legally bound to repay the loan. In this case, any interest payments made on that loan wouldn’t qualify for the deduction, regardless of whether you diligently fulfill all repayment obligations. This highlights the importance of establishing a clear legal obligation for the debt to ensure eligibility for interest deduction on business loans.
Both you and the lender intend for the debt to be repaid
A loan that doesn’t need to be repaid is considered a gift.
You and the lender have a genuine debtor/creditor relationship
Loans between family members are closely examined by the IRS. Additionally, if you use the accrual method of accounting, you cannot deduct interest owed to a family member until the payment is actually made.
Remember, if a loan serves both business and personal purposes, you must allocate the interest between the business and personal portions of the loan.
11. Legal and professional fees
Fees incurred for legal and professional services essential for operating your business are eligible for deduction. These encompass charges from lawyers, accountants, bookkeepers, tax preparers, and virtual bookkeeping services like Cocountant.
However, if these fees entail payments for services of a personal nature, such as creating a will, only the portion directly related to the business is deductible.
12. Moving expenses
Following the Tax Cuts and Jobs Act of 2017, the deduction for moving expenses was eliminated for nonmilitary individuals, but businesses retain the ability to deduct the expenses of relocating business equipment, supplies, and inventory between business locations.
Maintaining detailed records is crucial to substantiate all costs associated with your business relocation.
13. Rent expense
Rent payments for a business location or equipment are deductible as business expenses. It’s important to note that rent paid for your home, even if used as a home office, cannot be deducted as a business expense. However, such rent may be eligible for deduction as part of home office expenses.
14. Salaries and benefits
Salaries, benefits, and even vacation time compensated to employees are generally tax-deductible, provided they meet specific criteria:
- The recipient is not the sole proprietor, a partner, or an LLC member.
- The salary is reasonable, ordinary, and necessary.
- The rendered services were indeed provided.
15. Taxes and licenses
Various taxes and licenses pertinent to your business are deductible. These can include, but are not limited to:
- State income taxes
- Payroll taxes
- Personal property taxes
- Real estate taxes for business properties
- Sales tax
- Excise taxes
- Fuel taxes
- Business licenses
16. Telephone and internet expenses
If telephone and internet services are integral to your business operations, they can be considered deductible business expenses.
However, note that if you use a landline at home, the cost of the first line isn’t deductible, even if it’s solely used for work. Yet, if you have a separate landline dedicated to business use, its cost is deductible.
For cell phone and internet usage that serves both personal and business purposes, only the percentage attributable to business use is deductible. It’s crucial to maintain detailed records, like itemized bills, to substantiate the business usage portion in case of an audit.
17. Travel expenses
For a trip to qualify as business travel, it must be deemed ordinary, necessary, and away from your tax home. Your tax home is essentially the area where you conduct your business activities, regardless of your residential location. Business travel typically involves overnight stays or rests away from your tax home.
Deductible business travel expenses recognized by the IRS include:
- Transportation to and from your destination (by plane, train, bus, or car)
- Use of your car while at a business location
- Parking and toll fees
- Costs of taxis and other transportation modes during the trip
- Meals and lodging
- Tips
- Laundry and dry cleaning during the trip
- Business-related calls
- Shipping expenses for baggage, samples, or display materials
- Other similar ordinary and necessary expenses related to business travel
Make sure you maintain thorough records for evidence, including expense amounts, trip dates, meeting details, mileage logs (if applicable), and the business rationale for the trip. These records are crucial for substantiating your deductions, especially in the event of an audit.
18. Personal tax deductions for business owners
While the deductions mentioned above can typically be claimed on Schedule C or Form 1065’s Schedule K-1[11], there are additional tax breaks commonly utilized by small business owners on their individual tax returns.
1. Charitable contributions:
Sole proprietorships, LLCs, and partnerships cannot deduct charitable contributions as a business expense. However, the business owner may be eligible to claim the deduction on their personal tax return. To qualify, the donation must be made to a qualified organization. Starting from 2020 returns, taxpayers can claim up to $300 of cash contributions as an “above-the-line” deduction on Form 1040. For deductions exceeding this amount, the business owner must itemize deductions on Schedule A attached to Form 1040[12].
2. Child and dependent care expenses
If you pay for someone to care for a child or another dependent while you work, you may be eligible to claim the Child and Dependent Care Credit[13]. Qualifying individuals for care include children under age 13 or spouses or other dependents who are physically or mentally incapable of self-care.
The credit ranges from 20% to 35% of allowable expenses, limited to $4,000 for the care of one dependent and $8,000 for two or more dependents. IRS Publication 503[14] provides further details on this credit, and you’ll need to attach Form 2441 to your Form 1040 to claim it.
3. Retirement contributions
Contributions to employee retirement accounts can be deducted as a business expense. The deductible amount depends on the type of retirement plan in place. The IRS provides guidance on calculating retirement plan contributions and deductions.
4. Health care expenses
Apart from insurance premiums, out-of-pocket medical costs such as office co-pays and prescription expenses can also be deducted. These expenses are typically included in itemized deductions on Schedule A.
Self-employed business owners can additionally deduct health insurance premiums for themselves, their spouses, and dependents on Schedule 1 attached to Form 1040. However, if eligible to participate in a plan through a spouse’s employer, the business cannot deduct those premiums.
The bottom line
Tax deductions play a crucial role in reducing your tax liability, but you can’t maximize tax deductions if your books aren’t accurate—plain and simple. Missed receipts or poorly categorized expenses can cost you hundreds, if not thousands, in extra taxes. That’s why consistent, detail-oriented bookkeeping is crucial.
At CoCountant, our bookkeeping services ensure your day-to-day transactions stay up-to-date and you get clear, accurate monthly reports, setting you up for a smooth tax season with fewer surprises and every legitimate deduction accounted for. From expense tracking to monthly reconciliations, our comprehensive approach to bookkeeping helps you keep more of your hard-earned money—and all at a fixed monthly rate.
