For small businesses, the start of a new tax year can usher in the potential for lost profits in the shape of new lax laws. With thresholds and deductions shifting on a near-continuous basis, what applied last year to your business may not necessarily apply now, and you stand to lose money if you don’t stay up-to-date with any relevant changes.
In this guide, we’ll examine the key 2025 changes in tax law for small businesses, the deductions you need to be aware of, and how Harness can help keep your small business tax efficient and compliant.
Key takeaways
- Capitalize on Section 179: The immediate deduction limit for equipment and assets is now up to $1.3 million. Make major purchases to significantly lower taxable income.
- Audit-proof your records: Due to increased IRS funding for tax enforcement and investigation, careful year-round documentation is essential for all claims, especially 1099s and crypto income.
- Use high-value credits: Don’t miss out on special savings like the 20% QBI Deduction (pass-throughs) and the Work Opportunity Tax Credit (WOTC) for hiring.
- Maximize vehicle & travel: Choose between the 70 cents per mile deduction or tracking actual expenses. Don’t forget the 50% deduction for business meals.
- Review new tax thresholds: Check the increased Standard Deduction and QBI phase-out limits to make sure you choose the best filing method for your entity.
Table of Contents
- 2025 changes in tax law that small businesses need to know
- Small business tax deduction checklist 2025
- How Harness can help
2025 changes in tax law that small businesses need to know
2025 has seen major updates arrive in the small business tax arena, with the key changes as follows:
Expanded Section 179 deduction: This is great news for businesses planning capital expenditures. The limit for deducting the full purchase price of qualifying equipment has increased to $2.5 million, with the phase-out threshold beginning at $4 million.
Increased standard deduction: Adjusted by recent major legislation (notably, the One, Big, Beautiful Bill), these higher limits may shift the balance for some business owners filing Schedule C away from itemizing. The new amounts are:
- Single filers: $15,750 (up from $13,850 in 2024 estimates).
- Married filing jointly: $31,500.
- Head of household: $23,625.
QBI (Qualified Business Income) deduction: The popular 20% deduction for pass-through entities (LLCs, S-Corps) has been made permanent. The eligibility phase-out thresholds for the deduction have been significantly adjusted for income, with limitations (especially for specified service trades or businesses) beginning when a filer’s taxable income exceeds:
- Single filers: $197,300.
- Married filing jointly: $394,600.
Corporate tax rate review: The 21% flat corporate tax rate for C-Corps remains permanent, providing some much-needed stability in this area. That said, small business owners should still monitor ongoing legislative discussions regarding the sunset of individual tax provisions set for the end of 2025, which could impact pass-through income.
Clean energy credits: Businesses investing in sustainable operations, such as solar power, EV charging stations, or other green infrastructure, may qualify for enhanced, multi-year federal tax credits under the continuation of the Inflation Reduction Act (IRA).
Updated payroll tax rates: The Social Security wage base increased to $176,100. This means both employers and employees will pay Social Security taxes on more income, affecting payroll calculations. The rate remains 6.2% for both parties.
Work Opportunity Tax Credit (WOTC): This credit remains active, offering employers credits of up to $9,600 per qualified new employee hired from targeted groups (like certain veterans or the long-term unemployed). The credit is currently scheduled to expire after December 31, 2025.
Increased IRS compliance: Due to greater IRS funding, audits and enforcement are on the rise. Expect more scrutiny, especially around 1099 filings and the disclosure of cryptocurrency income. Meticulous record-keeping is therefore more important than ever.
State-level changes: Businesses operating in multiple jurisdictions should be aware of any independent state tax updates, which may include the widespread use of Pass-Through Entity Taxes (PTETs) to circumvent the federal State and Local Tax (SALT) deduction cap.
Small Business Tax Deduction Checklist (2025)
To help keep you efficient and organized, we’ve put together a checklist of the deductions that small businesses need to be aware of. It’s important to remember that all deductible business expenses must be deemed “ordinary and necessary” by the IRS.
Start-up and operating costs
Startup and organizational costs: Deduct up to $5,000 in each category immediately if costs are under $50,000.
Cost of Goods Sold (COGS): Fully deductible for inventory-based businesses (includes materials, direct labor, storage).
Utilities: 100% deductible for brick-and-mortar spaces—deduct the business portion of home office utilities, phone plans, and internet.
Business property rent/mortgage: 100% deductible for rented space, or deduct mortgage interest and property taxes for owned commercial property.
Insurance premiums: Fully deductible for most business policies (general liability, workers’ compensation, professional liability, and group medical for employees).
Taxes paid: Deductible items include real estate tax, the employer’s share of employment taxes (FICA and FUTA), and a choice between state and local income tax or state and local general sales tax (up to the annual limit, which is treated as an itemized deduction for individuals).
Bank and Transaction Fees: Deductible for processing fees, monthly maintenance charges, and other transaction costs.
Assets, equipment, and technology
Equipment and machinery: Lease costs are fully deductible as an operating expense, while purchased equipment may be immediately deducted using Section 179 (up to a $1,250,000 limit, phasing out over $3,130,000 in purchases) or the 60% Bonus Depreciation method, with any remaining cost subject to regular depreciation.
Office supplies and furniture: Office supplies are 100% deductible as an immediate expense, and office furniture is generally deductible in the year of purchase using Section 179 or 60% Bonus Depreciation.
Software and Subscriptions: Subscription fees (SaaS, cloud storage, POS systems) are an immediate operational expense deduction, while one-time purchases (like local software or specialized hardware) are typically deductible using Section 179 or 60% Bonus Depreciation or are otherwise amortized or depreciated.
Marketing, meals, and travel
Advertising and marketing: 100% deductible (billboards, web development, business cards, freelance design).
Business meals: 100% deductible for most business meals (with clients or employees) if provided by a restaurant, otherwise, they are generally 50% deductible.
Travel expenses: Fully deductible when away from home overnight for business. Includes airfare, lodging, tolls, taxis, ground transportation, in-flight WiFi, and laundry on extended trips.
Local transportation: Deductible costs for daily business travel (client meeting commutes, supply runs, parking fees).
Vehicle expenses
Deduction method options: You must choose one method for a vehicle:
- Standard mileage rate: Deduct 70 cents per mile for business travel in 2025.
- Actual expenses: Track and deduct all costs (gas, repairs, insurance, depreciation).
Employee and contract labor costs
Employee pay: Fully deductible for reasonable wages, salaries, and bonuses (note: does not apply to sole proprietors/partners).
Contracted labor: Fully deductible costs for hiring independent contractors and freelancers.
Employee benefits programs: Fully deductible for health insurance premiums, retirement plan contributions, and group benefits.
Employee gifts: Deductible up to $25 per recipient, per year, for gifts given to employees. However, certain low-value, non-cash items (de minimis fringe benefits) are 100% deductible.
Hiring family members: Wages paid are tax-deductible—additional tax advantages may apply (e.g., FICA exemption for children under 18).
Financial, legal, and professional costs
Interest paid: Generally deductible, but limited to 30% of Adjusted Taxable Income (ATI). Small businesses (gross receipts of $31 million or less) are exempt from this limit.
Bad debt: Fully deductible as an ordinary loss if the debt is proven to be worthless business debt and the income was previously included in revenue.
Legal and professional fees: Generally 100% deductible if they are ordinary and necessary for your existing business operations (e.g., tax, accounting). Fees to acquire capital assets are not deductible.
Professional development: Fully deductible for education that maintains or improves skills in your current business. Costs to qualify for a new trade or profession are not deductible.
Special deductions
Home office deduction: Deductible if the space is used regularly and exclusively for business, using either the:
- Simplified method: Deduct $5 per square foot (up to a maximum of $1,500).
- Regular method: Deduct a percentage of total qualified home expenses (e.g., rent, utilities) based on the office’s size.
Qualified Business Income (QBI) deduction: Allows eligible pass-through entities to deduct up to 20% of their business income.
Remote team expenses: Deductible costs for supporting a remote workforce (e.g., video conferencing subscriptions, stipends).
How Harness can help
Even with a comprehensive list of tax changes and deductions, it can be a difficult and time-consuming task for small businesses to stay tax-efficient. At Harness, we specialize in connecting small businesses to expert tax advisors. Whether you’re an LLC, S-Corp, or sole proprietor, our tax experts will make sure you make the most of every available deduction.
Offering more than just compliance, we design year-round strategies tailored to your business that help support growth. Get started with Harness and maximize the financial performance of your business.
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