Updated for Tax Season 2026 (2025 Tax Year)

If there is one universal truth for small business owners in the United States, it is this: It’s not what you make, it’s what you keep. As we settle into January 2026, the focus shifts entirely to closing the books on 2025 and preparing for the upcoming tax filing deadline.

This year is different. With recent legislative updates (often referred to in financial circles as the "2025 Tax Reform" or similar updates like the OBBBA provisions), the tax code has shifted in favor of small business investment. From the reinstatement of 100% Bonus Depreciation to massive increases in Section 179 limits, the opportunities to lower your taxable income are more powerful than they have been in years.

This guide will walk you through the top tax deductions available for US small businesses for the 2025 tax year. We will cover the "heavy hitters" that can wipe out massive tax bills, as well as the everyday expenses that add up to significant savings.

1. The "Heavy Hitters": Section 179 and Bonus Depreciation

For most small businesses, equipment and software costs are the largest annual expenditures. In 2025, the IRS supersized the incentives to buy assets.

Section 179 Expensing (The $2.5 Million Limit)

For the 2025 tax year, the Section 179 deduction limit has increased to $2,500,000. This allows you to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year, rather than depreciating it over time.

• The Cap: The deduction phases out dollar-for-dollar after you spend $4,000,000 on assets. This is designed strictly for small-to-medium businesses (SMBs), not giant corporations.

• What Qualifies: Machinery, office furniture, computers, off-the-shelf software, and even certain vehicles (like heavy SUVs or work trucks over 6,000 lbs).

100% Bonus Depreciation is Back

Perhaps the biggest news for 2025 filings is the reinstatement of 100% Bonus Depreciation for qualified property placed in service after January 19, 2025. Unlike Section 179, which is limited by your business's net income (you cannot use it to create a tax loss), Bonus Depreciation has no annual spending cap and can create a net operating loss (NOL) that you can carry forward to future years.

Pro Tip: If you bought a heavy work truck or new servers in late 2025, you can likely write off the entire cost on your 2025 return, drastically reducing your tax liability.

2. Qualified Business Income (QBI) Deduction

The Qualified Business Income (QBI) deduction (Section 199A) remains one of the most effective ways to slash your effective tax rate. It allows eligible business owners (sole proprietors, partnerships, S-corps) to deduct up to 20% of their qualified business income from their taxes.

Important Updates for 2025/2026

The QBI deduction is now permanent (no longer set to expire). However, income thresholds have adjusted for inflation:

• Single Filers: The full deduction is available if your total taxable income is under $197,300.

• Joint Filers: The threshold is $394,600.

If you are above these limits and run a "Specified Service Trade or Business" (SSTB)—like doctors, lawyers, or consultants—your deduction begins to phase out. If you are not an SSTB (e.g., you are an architect, engineer, or run a retail store), you can still claim the deduction, but it may be limited by the W-2 wages you pay to employees.

3. Vehicle Expenses: The 70-Cent Advantage

Did you use your car for business in 2025? The IRS standard mileage rate for 2025 was set at 70 cents per mile. This is a historic high and offers a massive deduction for real estate agents, sales reps, and mobile service providers.

Standard Mileage vs. Actual Expenses

You have two choices:

1. Standard Mileage Rate: Multiply your business miles by $0.70. Simple and often yields a higher deduction for fuel-efficient cars.

2. Actual Expenses: Track gas, insurance, repairs, tires, and depreciation. This is usually better for expensive, gas-guzzling vehicles.

Crucial Rule: You cannot switch from "Actual Expenses" to "Standard Mileage" on the same vehicle in later years. If you want the option to switch, you must choose Standard Mileage in the first year you use the car for business.

4. The SALT Deduction Cap Increase (State and Local Taxes)

For business owners in high-tax states like California, New York, or New Jersey, the old $10,000 cap on State and Local Tax (SALT) deductions was a painful limitation.

For the 2025 tax year, legislative updates have provided relief. The SALT deduction cap has increased to $40,000 for eligible taxpayers. This allows you to deduct significantly more of your state income taxes and property taxes on your federal return, potentially saving thousands for those in higher tax brackets.

5. The Home Office Deduction

With the remote work revolution settling into a permanent "hybrid" reality, the Home Office Deduction remains a staple. However, it is one of the most misunderstood deductions.

To qualify, your home office must meet two strict tests:

1. Exclusive Use: The area must be used only for business. The kitchen table doesn't count if you eat dinner there too.

2. Regular Use: It must be your principal place of business or a place where you regularly meet clients.

Simplified vs. Regular Method

• Simplified Method: Deduct $5 per square foot for up to 300 square feet (max $1,500). No receipts needed.

• Regular Method: Calculate the percentage of your home used for business (e.g., 10%) and deduct that percentage of your mortgage interest, rent, utilities, insurance, and repairs. This usually yields a higher deduction but requires meticulous record-keeping.

6. Employee Benefits and Retirement Contributions

One of the smartest ways to lower your taxes is to pay your future self.

Retirement Plans (2025 Limits)

• 401(k): Employees could contribute up to $23,500 in 2025.

• SEP-IRA: Self-employed individuals can contribute up to 25% of their net earnings, capped at roughly $69,000.

• SIMPLE IRA: An excellent option for small teams, with easier administration than a 401(k).

Health Insurance

If you are self-employed and show a net profit, you can deduct 100% of your health insurance premiums for yourself, your spouse, and your dependents. This is an "above-the-line" deduction, meaning it lowers your Adjusted Gross Income (AGI) directly.

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7. Startup and Organizational Costs

If 2025 was the year you finally launched your business, the IRS gives you a welcoming gift. You can deduct up to $5,000 in startup costs and $5,000 in organizational costs immediately in your first year.

• Startup Costs: Market research, advertising for the opening, travel to secure suppliers.

• Organizational Costs: State incorporation fees, legal fees for drafting the operating agreement, and accounting fees.

Note: These deductions phase out if your startup costs exceed $50,000.

8. Professional Fees and Contract Labor

Do not forget the costs of the experts who help you run your business.

• Legal & Professional Fees: Lawyers, accountants, and consultants are fully deductible.

• Contract Labor: Payments to freelancers and independent contractors are deductible. Reminder: If you paid any contractor more than $600 in 2025, you must file Form 1099-NEC by January 31, 2026, or face penalties.

FAQ: Common Small Business Tax Questions

Q: Can I deduct my work clothes? A: Generally, no. You can only deduct clothing if it is strictly a uniform and unsuitable for everyday wear (e.g., scrubs, safety gear, or a mascot costume). A business suit does not qualify.

Q: Is business entertainment still deductible in 2026? A: Business meals are generally 50% deductible if business is conducted. However, "entertainment" expenses (concert tickets, golf outings) are generally not deductible, even if you take a client.

Q: What is the deadline for filing 2025 taxes? A: For most S-Corps and Partnerships, the deadline is March 16, 2026. For Sole Proprietors and C-Corps (usually), the deadline is April 15, 2026.

Conclusion

The 2025 tax year offers a unique window of opportunity due to the expanded Section 179 limits and the return of 100% Bonus Depreciation. However, tax laws are complex and "gray areas" can lead to audits.

While this guide covers the "Top Tax Deductions," every business is unique. The best investment you can make is hiring a qualified CPA or tax strategist who understands your specific industry. Don't just file taxes—plan them.