Tax Deductions for New Businesses: What You Can Write Off in Year One (2026)
Starting a business comes with significant upfront costs — and most of them are at least partially deductible. Here’s what new business owners should know about writing off expenses in the first year and beyond.
Startup Costs: The Section 195 Rules
Expenses incurred before your business officially opens — market research, professional fees, travel to evaluate locations, training — are “startup costs” under Section 195, not ordinary business expenses. They’re treated differently:
- First $5,000: Immediately deductible in your first year of business
- Remaining amount: Amortized over 180 months (15 years), beginning with the month you open
If your startup costs exceed $50,000, the $5,000 immediate deduction phases out dollar-for-dollar ($50,001 in startup costs = $4,999 immediate deduction; $55,000+ = $0 immediate, full 180-month amortization).
Organizational costs (legal fees to form the entity, state filing fees) follow the same rules under Section 248 — $5,000 immediate, remainder over 180 months.
What counts as a startup cost: Legal fees for contracts and entity formation, accounting setup, marketing research, travel to investigate the business, training for initial staff.
What doesn’t count as a startup cost: Capital expenditures (these are separately depreciated), costs incurred after the business opens (these are ordinary deductions), costs for a business that never opens (technically deductible, but with different rules).
The Home Office Deduction
If you use part of your home regularly and exclusively for business, you can deduct the business-use portion of home expenses. Two methods:
Simplified method: $5 per square foot of dedicated office space, up to 300 square feet ($1,500 maximum). Easy to calculate, no depreciation recapture on home sale.
Actual expense method: Calculate the percentage of your home used for business (office square footage ÷ total home square footage), then apply that percentage to: mortgage interest or rent, property taxes, utilities, homeowner’s insurance, and home depreciation. More work, but often yields a larger deduction.
The “regular and exclusive use” requirement is strict: A guest bedroom with a desk doesn’t qualify. A dedicated room used only for business — even if it has some personal items — may qualify. The IRS looks at whether the space is your principal place of business for the activity.
Home office deductions for S-Corp owner-employees require a specific structure — you either work from an office the S-Corp reimburses you for (using an accountable plan) or you deduct as an unreimbursed employee expense (limited post-TCJA).
Vehicle Expenses
Two methods for deducting business use of a vehicle:
Standard mileage rate (2025): 70 cents per business mile. Track every business trip: purpose, destination, and mileage. Simple but limited to the IRS rate.
Actual expense method: Track all vehicle expenses (gas, insurance, registration, maintenance, depreciation) and multiply by the business-use percentage. More complex but can be larger if you have a fuel-inefficient vehicle or high actual costs.
You must choose at the first year you use the vehicle for business. If you use the standard mileage rate in year 1, you can switch to actual expense in later years (with some limitations). The reverse is not true.
Luxury vehicle limits: If you use an expensive vehicle for business, the deductible depreciation is limited by “luxury auto” caps regardless of actual cost. The 2025 cap for the first year (excluding bonus depreciation) is approximately $12,400 for passenger vehicles.
Section 179 and Bonus Depreciation
Rather than depreciating business equipment over its “useful life,” you may be able to deduct the full cost in year one.
Section 179 (2025): Deduct up to $1.22 million of qualifying property placed in service during the year. Qualifying property includes: computers, machinery, furniture, vehicles (with limits), and off-the-shelf software. Section 179 cannot exceed your business taxable income — it can’t create a loss.
Bonus depreciation: An additional first-year deduction on top of Section 179 for new and used qualifying property.
- 2023: 80% bonus depreciation
- 2024: 60% bonus depreciation
- 2025: 40% bonus depreciation (for 2025 tax year returns)
- 2026: 20% bonus depreciation
- 2027: 0% (full phase-out under current law)
Example: You purchase $80,000 in equipment in 2025. You elect Section 179 for the full $80,000 — entire cost deductible in year one, regardless of bonus depreciation phase-down.
Business Meals
Business meals (meals with clients, prospects, employees for business purposes) are 50% deductible under current law. Entertainment — sporting events, concerts, golf outings — was eliminated as a deduction by the TCJA and remains non-deductible.
Required documentation: Amount, date, business purpose, and business relationship with the other parties. A receipt plus a note in your calendar or expense report satisfies the substantiation requirement.
Health Insurance (Self-Employed)
Self-employed individuals (sole proprietors, partners, S-Corp shareholders owning >2%) can deduct health insurance premiums for themselves, their spouse, and dependents as an above-the-line deduction on their personal return. This deduction:
- Is not subject to the 7.5% AGI floor that applies to itemized medical deductions
- Cannot exceed your net self-employment income (or W-2 wages from the S-Corp)
- Is not available if you’re eligible for employer-subsidized health coverage through a spouse’s employer
This is a significant deduction — family health insurance premiums average $20,000–$25,000 per year. If you’re paying those premiums and not taking this deduction, you’re overpaying taxes.
Professional Fees, Software, and Subscriptions
Ordinary and necessary professional fees are fully deductible: accounting, legal, consulting. Software and SaaS subscriptions used for business are deductible either as immediate expenses (if you elect to expense rather than capitalize them) or as amortized costs.
Important: Startup accounting fees paid before the business opened are startup costs (Section 195). Accounting fees paid after opening are current deductions.
Prepaid expenses: If you prepay a 12-month subscription in December, you can generally deduct the full amount in the year paid (for cash-basis taxpayers), even though some of the benefit extends into the following year. This is a timing deduction — useful for December tax planning.
Frequently Asked Questions
What's the difference between startup costs and regular business expenses?
The distinction is timing relative to when your business ‘opens’ — defined as when you start providing services or selling products. Expenses incurred before that date are startup costs under Section 195, deductible up to $5,000 immediately with the remainder amortized over 15 years. Expenses incurred after opening are ordinary business expenses, fully deductible in the year incurred (for cash-basis taxpayers). The line can be blurry: if you spend money on market research 6 months before opening, that’s a startup cost. If you spend money on marketing the week you open, that’s an ordinary expense. Practical advice: document when your business ‘opened’ and track pre-opening vs. post-opening expenses separately from the start — it’s easier than reconstructing the distinction at tax time.
Can I deduct my home office if I also work from a coffee shop or coworking space sometimes?
Yes — the home office deduction doesn’t require that your home office be the only place you work. It requires that the space be used ‘regularly and exclusively’ for business. If you have a dedicated room at home that you use for work, and you also sometimes work from coffee shops or a coworking space, both can be deducted: the home office under the regular use standard, and the coworking fees and coffee shop purchases (where there’s a business purpose) as ordinary business expenses. The ‘exclusive use’ requirement applies to the home office space itself — the room must be used only for business, not as a guest bedroom that also happens to have a desk.
Is bonus depreciation still worthwhile in 2026 given the phase-down?
Bonus depreciation has phased down: 40% for the 2025 tax year (returns filed in 2026), declining to 20% for 2026. Section 179 remains at $1.22 million (2025 limit) and is generally more valuable than bonus depreciation for most small businesses because Section 179 lets you choose exactly which assets to expense and has no phase-down. The practical answer: for purchases within Section 179 limits, use Section 179 first to fully expense eligible assets. Bonus depreciation applies automatically to qualifying property not fully covered by Section 179 — at 40%, it’s still meaningful for large capital purchases. If Congress extends or makes permanent full expensing, this calculates differently. Plan for current law and treat any legislative fix as upside.
My business had a loss in year one. Can I still deduct startup costs?
Yes, you can still claim startup cost deductions even in a loss year — but the deduction increases your loss rather than reducing tax you’d otherwise owe. The first $5,000 of startup costs is deductible in year one regardless of profitability. If the deduction creates or increases a net operating loss (NOL), that NOL can carry forward indefinitely (under current law) to offset future profitable years. There’s no rule that says deductions are only valuable in profitable years — the loss is real and will reduce taxes in future years when the business is profitable. However, if the additional deduction from startup costs pushes you into a deeper loss with no foreseeable profitable years to apply it to, the timing benefit is limited. Discuss with your accountant whether it makes sense to amortize rather than immediately deduct startup costs in loss years.
I bought a car this year and use it 60% for business. How do I track this and what can I deduct?
You have two options, and you must choose in the first year: the standard mileage rate (70 cents per business mile for 2025) or the actual expense method (60% of all vehicle operating costs + 60% of depreciation). For the standard mileage rate, you track business miles driven with a mileage log: date, destination, and business purpose for each trip. Apps like MileIQ or Everlance automate this. For the actual expense method, keep records of all vehicle costs (gas, insurance, maintenance, registration) and calculate the business percentage (60%). The standard mileage rate is simpler but may be less valuable for vehicles with high operating costs or significant depreciation. If you choose standard mileage in year one, you have the option to switch to actual expense in future years (but generally not vice versa). Both options require a contemporaneous mileage log — the IRS has consistently disallowed vehicle deductions without one.