Small Business Tax Deductions: A Practical Guide for US Businesses

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise US Inc. or its affiliates, and it is not intended as a substitute for obtaining business advice from a Certified Public Accountant (CPA) or tax lawyer

Navigating the US tax code can feel like you’re steering a ship through fog, especially for small business owners. For small businesses, tax deductions are especially important, as margins are often tight. Learning the ins and outs of these deductions isn’t just about compliance, but it’s also useful to your financial strategy. Every dollar that’s properly deducted is a dollar that stays in your business.

Whether you run a side hustle from your home office or manage a corporation with global operations, finding out how to maximize tax deductions for small businesses is important for running a compliant and healthy business.

This guide walks you through the must-knows of US business deductions, provides a detailed small business tax deductions checklist, and explores how international expenses should be handled.

Need to send and receive cross-border business payments?
Try Wise Business ->

Table of contents

How Do Small Business Tax Deductions Work? Deduction vs. Tax Credit The “Ordinary and Necessary” Test The Small Business Tax Deductions Checklist: What Things Are Tax Deductions for Small Business Owners? How to Maximize Tax Deductions for Small Business Owners International Angle: Small Business Deductions for Foreign Founders in the US Deductions for Foreigners in the US Deducting Foreign Expenses for US Companies Reimbursement of Business Expenses Common Mistakes That Can Limit Small Business Tax Deductions How to Maximize Tax Deductions for Small Business Owners Final Thoughts

This article has been written in collaboration with Vincenzo Villamena, CPA and co-founder of Online Taxman and Entity Inc.

How Do Small Business Tax Deductions Work?

So, what are small business tax deductions? A tax deduction is a business expense that can be subtracted from gross income. When businesses reduce their taxable income, deductions lower the total amount of tax owed.

Deduction vs. Tax Credit

Tax breaks don’t just come in the form of deductions, however. There are also tax credits that help reduce your bill, but they work in a different way.

• Deduction: Reduces the amount of income subject to tax. For example, if your business has $100,000 in revenue and $20,000 in deductions, your taxable income becomes $80,000.
• Tax Credit: Reduces the tax bill dollar-for-dollar. A $1,000 tax credit means you owe $1,000 less in taxes, regardless of your taxable income.

Most small businesses rely far more on deductions than credits, which is why proper tracking matters to spot those legitimate write-offs.

The “Ordinary and Necessary” Test

But the key to understanding how small business tax deductions work lies in one simple but powerful IRS principle: The expense must be considered ordinary and necessary in carrying on your trade or business.

According to the Internal Revenue Service (IRS), an expense qualifies as deductible if it meets two criteria:

1. Ordinary: The expense is common and accepted in your specific industry or type of business. Here’s an example: For a web design firm, purchasing a high-end graphics card is ordinary. For a landscaping company, it’s not.
2. Necessary: The expense is helpful and appropriate for your trade or business. It must contribute to your business activity.

“Necessary” does not mean essential. It means only that the expense supports business activity. Personal or family expenses generally cannot be deducted, even if they have an indirect business benefit.¹

The Small Business Tax Deductions Checklist: What Things Are Tax Deductions for Small Business Owners?

Knowing which business expenses you can deduct will allow you to keep more of your hard-earned money. Here’s a detailed small business tax deductions checklist detailing what things are tax deductions for small businesses.²

Category I: Core Operating Expenses (Day-to-day)

Expense Item	Details & Rules for Deduction
Rent and Utilities	Deduct rent paid for your office, store, factory, or other property used strictly for business. Also deduct associated utilities (electricity, internet, phone) used exclusively for the business location.
Wages and Benefits	Full deduction for salaries, hourly wages, bonuses, commissions, and employer-paid payroll taxes, including associated employment taxes like Federal Unemployment Tax Act (FUTA) tax.
Professional Services	Fees paid to lawyers, accountants, bookkeepers, tax preparers, business consultants, and payroll services. Proper documentation and reporting (e.g., Form 1099-NEC) are essential.
Advertising & Marketing	Ordinary expenses for promoting your services, including website development, hosting, digital advertising campaigns, print ads, and logo design.
Office Supplies and Printing	Deduct costs for incidental materials, supplies, and postage used during the year (paper, pens, toner, basic software subscriptions).
Insurance Premiums	Premiums for various business insurance policies are deductible, including liability, malpractice, fire, theft, and business interruption insurance. Note: Health insurance premiums paid for yourself (if self-employed) may be deductible via the self-employed health insurance deduction.
Interest and Bank Fees	Interest paid on business loans, credit cards, and certain lines of credit used for business activities is deductible. Also includes general account and transaction fees. (See IRS guidance on Business Interest Deduction).

Category II: Capital Assets & Depreciation (Long-term value)

Expense Item	Details & Rules for Deduction
Assets and Depreciation	When buying long-term assets (machinery, computers, furniture), you deduct the cost over the item's useful life through depreciation.
Section 179 Deduction	Allows businesses to deduct the full purchase price of qualifying equipment and software placed into service during the tax year, up to certain limits.
Bonus Depreciation	Allows a business to deduct a percentage of the cost of new (and used) assets in the first year. Consult a tax professional for current applicable rates.

Category III: Travel, meals, and vehicle (Requires strict records)

Expense Item	Details & Rules for Deduction
Business Travel	Deductible travel expenses when away from your tax home overnight for business, including transportation (plane, train), lodging, and baggage fees.
Business Meals	For tax years after 2022, the deduction for business meals reverts to 50% of the cost, provided the meal is not lavish or extravagant, and the taxpayer (or an employee) is present. Excellent record-keeping is a must.
Vehicle Expenses	Deduct business-related vehicle use using either: 1) Standard Mileage Rate (plus tolls and parking) or 2) Actual Expenses (gas, oil, repairs, insurance, etc.). Accurate mileage logs are strongly recommended. (The IRS publishes the official Standard Mileage Rates annually).

Category IV: Specialized Deductions (Home-based and Start-up)

Expense Item	Details & Rules for Deduction
Home Office Deduction	Deduct expenses related to the portion of your home used exclusively and regularly for business. Calculated using either the Simplified Method or the Actual Expense Method.
Start-Up and Organizational Costs	The IRS allows you to deduct up to $5,000 in both business start-up costs and $5,000 in organizational costs in the year the business begins. Any excess must be amortized over 180 months.

---

Wise Business Could Help Your Company Save on Global Payments

---

How to Maximize Tax Deductions for Small Business Owners

Simply knowing what things are tax deductions for small businesses is only half the battle. To help your business minimize its tax liability while staying compliant, focus on these strategic areas.

1. Master Record-Keeping (The Golden Rule)

The most effective strategy to maximize tax deductions for small businesses is meticulous record-keeping. The IRS requires documentation for all claimed expenses. This includes:³

• The Amount of the Expense: The exact cost, evidenced by an invoice or receipt.
• The Time and Place: The date and location of the expenditure or travel.
• The Business Purpose: A brief, clear description of why the expense was necessary for your business (e.g., "Lunch with vendor Smith to discuss Q4 marketing contract").
• The Business Relationship: For meals and gifts, the name and relationship of the person receiving the benefit.

Digital solutions, including business banking and expense management apps, are great tools for documenting expenses, especially for separating business from personal expenses.

2. Use Special Business Deductions

• Qualified Business Income (QBI) Deduction (Section 199A)⁴: This allows owners of certain pass-through entities (sole proprietorships, partnerships, S corporations, and certain LLCs) to deduct up to 20% of their QBI, subject to various limits. This is one of the most significant deductions available to small businesses today.
• Retirement Plan Contributions: Contributions made to qualified retirement plans, such as a SEP IRA, SIMPLE IRA, or 401(k), are fully deductible and provide a powerful way to reduce taxable income while investing in your future.

3. Plan Capital Expenditures Strategically

For many growing small businesses, when you make large purchases like machinery, fleet vehicles, or software systems can have a big impact on your tax bill. Tools like Section 179 expensing and Bonus Depreciation let you accelerate deductions, so you can time large write-offs to correspond with high-income years. Always run these plans by your CPA before you purchase any equipment.

International Angle: Small Business Deductions for Foreign Founders in the US

If your business operates globally, or if you’re a foreign business owner establishing operations in the US, tax deduction calculations can get a lot more complicated.

Common challenges include:

• Paying overseas suppliers or contractors
• Managing multiple currencies
• Tracking exchange rates and fees
• Separating personal and business transactions

From a record‑keeping perspective, clarity matters. The IRS expects expenses to be converted into US dollar amounts, with documentation showing the business purpose of each transaction.

Deductions for Foreigners in the US

A foreign individual or company operating a business in the US is generally only taxed on income that is Effectively Connected Income (ECI) with a US trade or business.

The good news is that deductions related to the US business activity can be claimed against ECI. However, a non-resident alien must file a US tax return (Form 1040-NR or appropriate business return) to claim these deductions. Failure to file can result in the denial of all business deductions, meaning the individual or company would be taxed on the gross income.⁵

Deducting Foreign Expenses for US Companies

If your US-based business pays for deductible items like contractor invoices, overseas payroll, SaaS subscriptions, or foreign rent in a foreign currency, you’ll need to convert these expenses into US Dollars (USD) to report them to the IRS.

The IRS generally expects transactions to be recorded in USD using the exchange rate in effect on the date the payment was made.

Reimbursement of Business Expenses

Learn from the Experts at Online Taxman 🔍

If you are a business owner taking a salary from your company, it's important to understand the tax implications of reimbursements. Any amount you reimburse yourself for a business expense will be counted as taxable income and must be reported on your W-2. To optimize your S Corporation's tax situation, you can implement an Accountable Plan. This allows your business to advance or reimburse qualifying expenses without reporting the amounts as taxable wages. An accountable plan must be set up properly, so talk to a tax expert.

Common Mistakes That Can Limit Small Business Tax Deductions

Even with a solid understanding of tax deductions, mistakes in applying them can significantly reduce the amount you’re able to claim. One of the most common mistakes is failing to separate personal and business finances. Using the same account or card for both makes it harder to prove business purpose if the IRS requests documentation, and in some cases, can lead to deductions being disallowed entirely.

Another common issue is timing. Whether an expense counts in a particular tax year often depends on when it’s paid or incurred, and that can vary based on whether a business uses the cash or accrual accounting method. Claiming expenses in the wrong tax year can lead to inconsistencies that require amendments later. Deductions related to meals, vehicles, and home offices also tend to be heavily reviewed, making accuracy especially important in these categories.

Poor documentation is another major risk. Keep all receipts, invoices, contracts, and payment confirmations for all claimed expenses. Even legitimate deductions can be denied without the right documents.

How to Maximize Tax Deductions for Small Business Owners

Maximizing deductions isn’t about stretching the rules, but about organization, consistency, and awareness. Here are some practical, compliance‑focused strategies.

Keep Detailed Records

The IRS places strong emphasis on documentation. This includes:

• Receipts and invoices
• Bank and account statements
• Mileage logs
• Contracts and agreements

Digital record‑keeping systems can make audits and reviews significantly less stressful.

Separate Business and Personal Finances

Maintaining separate accounts for business activity helps:

• Reduce errors
• Support deduction eligibility
• Simplify tax preparation

Understand Allocation Rules

Many expenses are partially personal and partially business-related. Only the business portion is deductible, and the IRS expects you to use a reasonable way to allocate expenses.

Work with Qualified Professionals

Tax professionals can:

• Identify deductions you may have missed
• Flag expenses that may raise compliance concerns
• Ensure correct filing based on your business structure

Remember, this article is not a substitute for professional advice, but it can help you ask better questions.

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

Final Thoughts

Knowing how small business tax deductions work and keeping sound records is the ultimate key to smart money management. While the goal is always to maximize tax deductions for small business owners, doing so requires you to support each claim with transparent, verifiable records.

Talk with a tax professional today to see how these tips fit your specific business structure and financial goals.

This article has been written in collaboration with Vincenzo Villamena, CPA and co-founder of Online Taxman and Entity Inc.. Originally from Michigan, Vincenzo began his career at PwC before moving abroad in 2005. He founded Online Taxman to help other expats file and optimize their US taxes securely and easily from abroad and Entity Inc., which focuses on US companies for global entrepreneurs, from setup to compliance. He currently resides in Brazil. Online Taxman and Entity Inc. now proudly serves US expats and international entrepreneurs in almost every country in the world.

---

Sources:

1. Publication 334 (2025), Tax Guide for Small Business | IRS
2. Credits and deductions for businesses | IRS
3. What kind of records should I keep | IRS
4. Qualified business income deduction | IRS
5. Effectively connected income (ECI) | IRS