What Small Business Tax Cuts Can You Claim?

For small business owners, understanding available tax relief is a key part of managing finances. These opportunities, primarily deductions that lower taxable income and credits that directly reduce a tax bill, are designed to encourage growth. The benefits available to a business often depend on its size, structure, and activities, so a proactive approach to tax planning ensures these financial advantages are not overlooked.

The Qualified Business Income Deduction

A significant tax provision for many small businesses is the Qualified Business Income (QBI) deduction, also known as the Section 199A deduction. This allows owners of pass-through entities—sole proprietorships, partnerships, S corporations, and certain trusts and estates—to deduct up to 20% of their qualified business income. This deduction is taken on the owner’s personal tax return, reducing their adjusted gross income, and is available regardless of whether the taxpayer itemizes or takes the standard deduction.

The final deduction cannot exceed the lesser of two amounts: 20% of the business’s QBI or 20% of the taxpayer’s taxable income before the QBI deduction, minus any net capital gains. For many business owners, this means a straightforward 20% reduction of their business income. This calculation is handled on Form 8995 for most taxpayers whose income falls below certain thresholds.

The rules become more complex for taxpayers with higher incomes. For 2025, the income thresholds are $197,300 for single filers and $394,600 for those married filing jointly. If a taxpayer’s income exceeds these levels, the deduction may be limited based on the amount of W-2 wages paid by the business or the unadjusted basis immediately after acquisition (UBIA) of qualified property. These additional calculations are performed on Form 8995-A.

Specific rules apply to a Specified Service Trade or Business (SSTB). These are businesses where the principal asset is the reputation or skill of its employees, such as those in the fields of health, law, accounting, consulting, and athletics. For an SSTB, the QBI deduction is phased out for single filers with taxable income between $197,300 and $247,300, and for those married filing jointly with income between $394,600 and $494,600. The deduction is eliminated for an SSTB once income surpasses the upper end of this range.

Asset and Capital Expenditure Deductions

Businesses investing in new or used equipment and other assets can accelerate tax savings through immediate expensing. Two prominent provisions, Section 179 and bonus depreciation, allow a business to deduct a large portion of an asset’s cost in the year it is placed in service rather than depreciating it over many years. These deductions are claimed on Form 4562.

Section 179 expensing allows a business to deduct the full purchase price of qualifying assets, such as machinery, equipment, and certain software. For 2025, the maximum amount a business can expense under Section 179 is $1,250,000. This deduction is subject to an investment limitation; if a business’s total qualifying property purchases for the year exceed $3,130,000, the Section 179 deduction is reduced dollar-for-dollar for every dollar spent over that threshold.

Bonus depreciation is another accelerated depreciation method. For 2025, businesses can take a bonus depreciation deduction of 40% of the cost of qualifying property. This rate is part of a scheduled phase-out; it was 60% in 2024 and is set to decrease to 20% in 2026 before being eliminated under current law. Unlike Section 179, there is no annual dollar limit or investment cap on the total amount of assets that can qualify for bonus depreciation. This provision is particularly useful for larger businesses or those making substantial capital investments that exceed the Section 179 spending cap.

Section 179 offers more flexibility, as a business can choose which specific assets to expense. Bonus depreciation applies to all assets within a specific property class, offering less control but a potentially larger deduction for very high levels of investment. In many cases, a business can use both; it can first apply the Section 179 deduction up to its limit and then claim 40% bonus depreciation on the remaining cost of the assets.

Credits for Employee-Related Costs

Several federal tax credits encourage small businesses to provide employee benefits or hire individuals from specific backgrounds.

The Retirement Plans Startup Costs Tax Credit helps businesses establish a new retirement plan. For employers with 50 or fewer employees, the credit covers 100% of administrative and setup costs, up to $5,000 per year for three years. For businesses with 51 to 100 employees, the credit covers 50% of those costs, up to the same $5,000 cap. A separate credit is available for employer contributions made to the new plan, further lowering the financial barrier for offering benefits like a SEP IRA or SIMPLE IRA. These credits are claimed using Form 8881.

The Small Business Health Care Tax Credit provides relief to employers who offer health insurance to their employees. To be eligible, a business must have fewer than 25 full-time equivalent (FTE) employees and pay average annual wages below an inflation-adjusted threshold of around $66,000 for 2025. The business must also contribute at least 50% of the premium costs for employee-only coverage through a SHOP Marketplace plan. The credit can be worth up to 50% of the premiums the employer pays and is claimed on Form 8941. It is calculated on a sliding scale, with the largest credits going to the smallest businesses with the lowest average wages.

The Work Opportunity Tax Credit (WOTC) is available to employers who hire individuals from targeted groups facing significant barriers to employment. These groups include certain veterans, ex-felons, and recipients of some forms of public assistance. The WOTC is extended through the end of 2025 and can provide a credit of up to $2,400 for each eligible new full-time employee who works at least 400 hours in their first year. Employers must first request certification for an eligible employee by filing Form 8850.

Common Operational Expense Deductions

Small businesses can deduct many ordinary and necessary expenses tied to daily operations. Common deductions include using a personal home as an office and a vehicle for business purposes.

For business owners who use a portion of their home exclusively and regularly for their trade, the home office deduction offers a way to write off a share of household expenses. Taxpayers have two options for this deduction. The simplified method allows a standard deduction of $5 per square foot of the home office, up to a maximum of 300 square feet, for a total deduction of $1,500. The actual expense method involves calculating the percentage of the home used for business and deducting that portion of actual expenses like mortgage interest, insurance, and utilities, which can result in a larger deduction but requires meticulous records.

When a vehicle is used for business travel, its costs can be deducted using one of two methods. The standard mileage rate allows a taxpayer to deduct a set amount for each business mile driven; for 2025, this rate is 70 cents per mile. This method requires keeping a log of business mileage. The actual expense method allows for the deduction of a percentage of the vehicle’s total costs, including gas, insurance, repairs, and depreciation, based on the ratio of business miles to total miles driven for the year.

Businesses can also deduct costs associated with getting started. The IRS allows a business to deduct up to $5,000 in startup costs and another $5,000 in organizational costs in its first year of operation. This immediate deduction is reduced if total startup costs exceed $50,000. Any costs that are not deducted in the first year must be amortized over a period of 15 years.