Key Takeaways
- Running a small business can provide several lucrative opportunities to lower your tax bill.
- Compared to filing taxes as a W-2 employee, small business owners can deduct more expenses to keep money in their pockets.
- Self-employed people can split some expenses shared for business and personal use as deductions on their tax returns.
7 ways to lower your tax bill as a small business owner
Owning a small business means wearing multiple hats. You're likely more focused on running the business than optimizing your tax efficiency. However, you've got several options for lowering your tax bill through popular small business tax deductions. In turn, you can reinvest these savings back into your business.
Below are seven small business tax deductions you can use to lower your tax bill, and manage business expenses efficiently.
1. Pay for health insurance
There's no denying it, buying health insurance can be costly. Fortunately, the IRS has special advantages for self-employed people who pay for their own insurance. If you work for yourself and pay for your own health insurance, you may be able to lower your tax bill.
Workers who receive health insurance coverage through their employer often share the cost of those premiums. But if you work for yourself as a freelancer, independent contractor, gig worker or generally as a self-employed person–and you can't receive health insurance coverage through your spouse–you may be able to claim the self-employed health insurance deduction.
What small business health insurance expenses qualify for a deduction?
If you meet the requirements for claiming this deduction, you may be able to deduct all or part of your insurance premium. The adjustment you claim is typically limited to your net profit from the trade or business under which the insurance plan is established. This can lower your tax bill, saving you money each year you qualify for claiming the deduction.
The deductibility extends to self-employed individuals for:
- medical
- dental
- vision
- long-term care insurance premiums
You can also claim the deduction for your spouse or any qualifying dependents age 26 or younger at the end of the tax year.
2. Save for retirement
As a small business owner, you have several tax-advantaged retirement savings options to consider for maximizing your retirement savings and reaping tax benefits.
What are some common retirement savings plans I can contribute to in order to lower my taxes?
Solo 401(k)
If you are self-employed without any employees, you might consider establishing a single-participant 401(k) plan, often called a "Solo 401(k)." This allows you to save up to 100% of your income as an employee contribution, up to the annual limit. In addition to the employee contribution, you might also be eligible for an employer contribution based on your net income from self-employment.
In 2025, you may be able to contribute up to $70,000 to your solo 401(k) ($72,000 for 2026). Additionally, the limit is increased by an extra $7,500 if you're 50 to 59 or 64 or older through a catch-up contribution for 2025 ($8,000 for 2026). For those age 60 through 63, the catch-up contribution is increased to $11,250 (same amount for 2026).
Even if you have access to an employer's 401k plan, you'd want to consider a Solo 401(k) if you're also self-employed or working a side gig because you can often set aside more money than through your employer's retirement plan.
Simplified Employee Pension Individual Retirement Account (SEP IRA)
Another option to consider is the Simplified Employee Pension Individual Retirement Account, or SEP IRA. For 2025, this retirement account generally allows you to save up to 25% of your income or $70,000, whichever is less (25% of income or $72,000 for 2026). However, you can only use the first $350,000 of income ($360,000 for 2026) to calculate 25% of your income for the year.
If you're self-employed, special rules for calculating your contribution limit may reduce the amount you can contribute to a SEP IRA each year.
IRAs
You've also got the ability to contribute to traditional and Roth IRAs, potentially further lowering your tax bill. For the 2025 tax year, you can put up to $7,000 in IRAs ($7,500 for 2026), or up to $8,000 if you're at least 50 years old ($8,600 for 2026).
How can I reduce my taxes even more with the Saver's Credit?
And if these tax savings aren't enticing enough, you may also be eligible for claiming the Saver's Credit worth up to $1,000 ($2,000 married filing jointly) just for contributing to your retirement account. The Saver's Credit can be claimed for your contributions to a:
- 401k
- 403(b)
- 457 plan
- Simple IRA
- SEP IRA
- traditional IRA
- Roth IRA
3. Claim the qualified business income deduction
If you report business income on your personal tax return, you may be eligible to claim the qualified business income (QBI) deduction, also known as the Section 199A deduction.
The qualified business income deduction allows eligible self-employed people and small business owners to deduct up to 20% of their qualified business income on their taxes. Plus, starting with the 2026 tax year, a minimum deduction of $400 is available for eligible taxpayers (the minimum deduction will be adjusted for inflation each year beginning in 2027).
Which small business owners qualify for the QBI deduction?
Entities eligible to claim the qualified business income deduction include:
Generally, for the 2026 tax year, you may qualify for the QBI deduction if your taxable income is under $197,300 for single filers or $394,600 for joint filers in 2025 ($201,750 or $403,500 for 2026). If you earn more than your applicable income limit, you may receive a prorated deduction.
What's included in the qualified business income deduction?
If you meet the above requirements, you'll also need to understand what goes into your "qualified business income." Generally, the IRS defines it as "the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business." That means income, gains, losses and expenses incurred as part of your business.
What's not included in the qualified business income deduction?
What it doesn't mean is:
- capital gains or losses
- dividends
- interest income
- income earned outside the U.S.
- certain wage and guaranteed payments made to partners and shareholders
If your business is considered a specified service trade or business, the Section 199A deduction does not apply when taxable income is above $494,600 for joint filers and $247,300 for single filers in 2025 ($553,500 and $276,750, respectively, in 2026). If your 2025 taxable income is between $394,600 and $494,600 for joint filers ($403,500 and $553,500 for 2026), or between $197,300 and $247,300 for single filers ($201,750 and $276,750 for 2026), claiming the deduction is partially allowed as a specified service trade or business. Examples of specified service trade or business include doctors, lawyers, accountants, financial planners, consultants and other professional services.
4. Using your car for business purposes
Depending on the nature of your business, you may need to drive as part of your work. If you choose to buy a company vehicle, it could result in lower taxes through deductions the IRS makes available to small businesses.
How much can I claim for the business vehicle deduction?
You can generally figure the amount of your deductible car expense by using one of two methods:
Standard mileage rate. The IRS allows you to deduct expenses related to operating and maintaining your business vehicle per mile driven. In 2025, the standard mileage rate is 70 cents per mile. For the first half of 2026 the rate is 72.5 cents per mile. It jumps to 76 cents per mile for the second half of 2026 because of higher fuel costs.
To determine the number of miles driven for business, you'll need two numbers for your business vehicle (or vehicles): the total number of miles driven during the year and total number of miles driven just for business.
You'll need to log your business miles to make sure you only deduct for those miles driven and not for personal use. This will also need to be mileage driven above and beyond your normal commute between your home and workplace.
Actual expenses. The IRS allows you to tally all of your auto-related business expenses and use this method for calculating the allowable deduction on your car as an alternative to the standard mileage rate. Deductible expenses include costs like:
- gas and oil
- maintenance and repairs
- tires
- registration fees and taxes (also deductible under the standard mileage deduction)
- licenses
- rental or lease payments
- insurance
- and more
Again, you'll need to keep track of how much you used your vehicle for business versus personal use. Based on the percentage used for business, you can deduct the applicable amounts of your actual vehicle expenses if it saves you more money on your taxes than the standard mileage rate.
5. Depreciation expense
Owning equipment is often an essential part of a functioning small business. As these assets age and experience normal wear and tear, their value depreciates. The IRS allows you to offset a portion of your income equivalent to the asset's reduction in value over its useful life.
However, depending on the assets you buy, you might have a few different means for claiming a deduction for depreciation:
- Section 179 deduction. Section 179 expensing simplifies your bookkeeping, giving you a large deduction in the first year the asset is placed in service. In 2025 the deduction limit is $2,500,000 from your business income ($2.56 million for 2026).
- Bonus depreciation. This differs from Section 179's fixed maximum deduction amount by allowing you to deduct a large percentage of the purchase price of eligible assets. The Tax Cuts and Jobs Act of 2017 doubled the bonus depreciation deduction from 50% to 100% to begin with, but it was reduced to 60% for 2024, meaning you often couldn't deduct a larger portion of the cost of new or used equipment you purchased and placed into service. However, the "One Big Beautiful Bill" (also known as the Working Families Tax Cut) restored and made permanent 100% bonus depreciation for assets placed in service after January 19, 2025.
- MACRS depreciation. The Modified Accelerated Cost Recovery System allows businesses to take larger tax deductions in the early years of an asset's life and smaller deductions in later years. This allows businesses to reduce their taxable income today, but increasing it later as compared to using straight-line depreciation. This gives you a lower net present value of your tax burden, saving you money.
Investing in your company allows you to deduct these expenses all at once, or over several years. In either situation, the depreciation deduction lowers your taxable income, reducing your tax bill.
For vehicles used for your business, you may be able to claim a deduction for depreciation from your income. But before you splurge on a fancy vehicle to write off on your taxes, you should be mindful of rules the IRS has in place regarding luxury autos.
Can I claim depreciation for vehicles I use for my business?
For new and pre-owned vehicles put into use in 2025 (assuming the vehicle was used 100% for business), the maximum first-year depreciation write-off is $12,200 ($12,300 for 2026), plus up to an additional $8,000 in bonus depreciation.
If you've purchased an SUV with a loaded vehicle weight over 6,000 pounds, but no more than 14,000 pounds, typically 100% of the vehicle's cost can be expensed in the year of acquisition using bonus depreciation, which is treated as an actual expense for calculating your net income.
TurboTax Tip:
The One Big Beautiful Bill restored and made permanent 100% bonus depreciation for assets placed in service after January 19, 2025.
6. Home office deduction
The home office deduction is a valuable tool small business owners can use to reduce their tax bill each year.
Who qualifies for the home office deduction?
Claiming it requires you to meet two criteria:
- Exclusive and regular use: You must use a portion of your house, apartment, condominium, mobile home, boat or similar structure exclusively for your business on a regular basis. This also includes structures on your property, such as an unattached studio, barn, greenhouse or garage. It doesn't include any part of a taxpayer's property used exclusively as a hotel, motel, inn, or similar business.
- Principal place of business: Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients. Some exceptions to this rule include daycare and storage facilities.
Exclusive use means only business activity is conducted inside the office. This doesn't mean you need to rush out if you get a personal call unrelated to business or no family member can go into your office. Instead, the IRS looks for you to meet the spirit of the exclusive use test as long as personal activities invade the home office no more than they would be permitted to happen inside an office building.
The office needs to be clearly defined from other personal-use areas of your home to qualify. Further, you need to regularly use the home office as your principal place of business.
7. Financing costs for the business
The IRS allows you to deduct most of the financing costs you pay for your business, such as:
- fees and
- interest on loans
- credit cards and other forms of credit
However, you'll need to meet certain requirements on some finance charges you pay on loans you take for capital assets used in your business. Further, you might not be able to deduct interest on any loans that charge non-deductible interest. That said, unless the interest you pay is subject to special limitations, it typically counts as a deductible business expense on your taxes.
Some examples of deductible financing costs you might need to take on for your business are:
- mortgage interest on an office building
- financing charges built into a lease contract
- fees associated with invoices that have extended payment terms
Does the new tax bill help small business owners?
The "One Big Beautiful Bill," which was signed into law in July 2025, helped small business owners in several ways, including:
- making the QBI deduction permanent and establishing a minimum deduction for certain business owners ($400 for the 2026 tax year)
- reinstating 100% bonus depreciation for property placed in service after January 19, 2025
- increasing the Section 179 expensing limit for 2025 from $1.25 million to $2.5 million (it's up to $2.56 million for 2026 after being adjusted for inflation)
- restoring immediate deduction for certain research and development (R&D) costs (certain small businesses can apply this change retroactively to the 2022 to 2024 tax years)
- raising the threshold for issuing a Form 1099-NEC or Form 1099-MISC to a contractor from $600 to $2,000 (this will result in fewer forms that certain business owners need to file)
- reestablishing the $20,000/200 transactions threshold for issuing a Form 1099-K (small businesses will receive fewer forms than under the $600 threshold previously set to take effect in 2025)
- moving the cap on the business interest deduction back to the EBITDA standard (rather than the stricter EBIT standard)
- extending and enhancing the Paid Family and Medical Leave Credit
- increasing the Employer-Provided Child Care Credit from 25% to 40% of qualified costs (50% for certain small businesses), and raising the total credit limit for the 2025 tax year from $150,000 to $500,000 ($600,000 for small businesses)
Effective dates vary – some applied to the 2025 tax year, while others aren't effective until the 2026 tax year.
Employ tax planning for your small business
In small business, every penny counts. If you can lower your tax liability, it may result in extra profit you get to keep—or reinvest in your business. Fortunately, the IRS has provided several opportunities to lower your tax bill as a small business owner.
Some of these require tax planning in advance, such as choosing the right vehicle for your business, suitable retirement account contributions, and more. To make the most of the deductions available to you, consider working with a tax professional who can identify your unique needs.
With TurboTax Experts for Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Our small business tax experts are matched to your specific industry and stay up to date on the latest tax laws, ensuring you get every credit and deduction possible to keep more money in your business. Small business owners get access to unlimited, year-round advice and answers at no extra cost and a 100% accurate, Expert Approved guarantee.
