Business Deductions: What You're Missing and What You're Misunderstanding

Most deduction advice is a list of things to claim. This isn't that.

In practice, two different problems cost small business owners money. The first is deductions they never take, usually because nobody told them the deduction existed or because they assumed it was gone. The second is deductions they do take but claim in the wrong amount or through the wrong mechanism for their entity type. The second problem is worse, because it feels like it's handled.

Here are five of each. Several of these changed for 2026, and a lot of what's online hasn't caught up.

Part 1: Five you're leaving on the table

1. Your S Corp doesn't have an accountable plan

If you run an S corporation and you're paying business expenses out of your own pocket, you're probably deducting none of them.

Here's why. As a shareholder-employee, you're an employee. An employee's unreimbursed business expenses are miscellaneous itemized deductions, and those were suspended by the Tax Cuts and Jobs Act. The One Big Beautiful Bill Act (OBBBA) made that suspension permanent under IRC 67(h). There's no expiration date on it anymore.

So, the home office, the mileage, the cell phone, the home internet, the continuing education: a sole proprietor deducts all of it on Schedule C. An S Corp owner without an accountable plan deducts zero. Same expenses, same person, different result.

The fix is about one page of paperwork. Adopt a written accountable plan under Reg. 1.62-2, which requires a business connection, substantiation within a reasonable period, and return of any excess. Submit expense reports, have the corporation reimburse you. The reimbursement is deductible by the corporation, tax-free to you, and it never touches your W-2.

One catch. You must adopt the plan before the reimbursements happen. You can't retroactively bless last year's spending. Getting one drafted and adopted correctly is routine business advisory work.

2. Depreciation you forgot to claim in prior years

Owners assume missed depreciation is gone. It isn't, and the recovery mechanism is better than most people expect.

Once you've used an incorrect depreciation method on two consecutive returns, it becomes a method of accounting. That sounds bad but is good news. You can't fix it by amending, but you can file Form 3115 as an automatic accounting method change (designated change number 7 under Rev. Proc. 2025-23) and take the entire catch-up as a Section 481(a) adjustment in the current year. That adjustment is computed without regard to the statute of limitations, so it reaches back into years that are otherwise closed, and because it's in your favor you take all of it at once.

There's also a reason not to just leave it alone. When you sell the asset, your basis is reduced by depreciation "allowed or allowable." Skipping the deduction doesn't preserve your basis. You lose the deduction and you still take the basis reduction. Not claiming depreciation is strictly worse than claiming it. This is one of the more common finds in a tax return review.

3. Startup and organizational costs

Under IRC 195, you can deduct up to $5,000 of startup costs in the year the business begins, reduced dollar for dollar once total startup costs pass $50,000. Anything left over is amortized over 180 months. If you're an S Corp, IRC 248 gives you a separate $5,000 for organizational costs like incorporation fees and the legal work on your bylaws.

These amounts have never been indexed for inflation. They're the same in 2026 as they were in 2004, and OBBBA didn't change them, whatever a headline may have told you.

The part people get wrong is timing. Both the deduction and the 180-month clock start with the month the business becomes active, not the month you formed the LLC and not the month the EIN came through. Money spent in 2025 for a business that opened in 2026 belongs on the 2026 return. And if you investigated a business, spent the money, and then never opened, Section 195 gives you nothing.

4. Putting your kids on payroll

If you operate as a sole proprietor, or as a partnership where both partners are the child's parents, wages paid to your child under 18 are exempt from Social Security and Medicare tax. Under 21, they're also exempt from federal unemployment tax. Income tax withholding still applies at any age.

The 2026 standard deduction for a dependent is the greater of $1,350 or $450 plus earned income, capped at $16,100. So, a child earning $16,100 in real wages owes no federal income tax on it, and you deduct every dollar.

Two warnings. First, an S corporation gets none of this. The exemption is written for sole proprietorships and parent-only partnerships, and corporations are specifically excluded. If you made the S election, you traded this away. Second, this is a well-known audit target. The work has to be real, age-appropriate, and actually performed. Keep a job description and time sheets, pay a defensible rate for the work, run it through payroll properly, and deposit into an account in the child's name.

5. The new QBI minimum deduction

New for 2026: if you have at least $1,000 of qualified business income from a business you materially participate in, you get a minimum QBI deduction of $400 even when the regular calculation produces less. Both figures are indexed going forward.

That's small on its own, but two larger Section 199A changes came with it. OBBBA made the qualified business income deduction permanent, and it widened the phase-in ranges from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. For 2026, the threshold amounts are $201,750 single and $403,500 joint, with the phase-in running up to $276,750 and $553,500.

That matters most if you're in a specified service trade or business, which covers accounting, law, consulting, health, and financial services. The wider range means you keep part of the deduction further up the income scale than the old rules allowed.

One thing 199A does not do: it doesn't reduce self-employment tax. It's a deduction against taxable income only.

Part 2: Five you're claiming wrong

6. Business meals

Meals are 50% deductible. The 100% deduction for restaurant meals was a pandemic-era provision, and it expired on December 31, 2022. Entertainment isn't deductible at all and hasn't been since 2018. If you take a client to a game, the tickets are gone, and the food is deductible at 50% only if it's stated separately on the invoice.

The requirements are specific. The expense has to be ordinary and necessary, not lavish or extravagant, you or an employee has to be present, and the meal has to be provided for a business associate. Section 274(d) then requires you to substantiate the amount, the time and place, the business purpose, and your business relationship to the person you fed. A credit card statement showing $180 at a steakhouse proves you spent $180 at a steakhouse. It doesn't prove the other four things.

Here's what changed this year, and most of the tax content online is still behind on it. OBBBA added IRC 274(o), effective January 1, 2026. Meals provided to employees for the convenience of the employer, and expenses for an employer-operated eating facility went from 50% deductible to zero. The IRS confirmed it in Publication 15-B for 2026. If you've been feeding your team on site and deducting half, that deduction is gone this year.

Whether ordinary office coffee and snacks get caught by the new rule is unsettled. The statute is written around eating facilities and Section 119 meals, which suggests a breakroom snack basket is still 50%. Reputable firms have landed on both sides of it and the IRS hasn't issued guidance. If you have meaningful dollars in that category, track them in a separate account this year so you can go in either direction once guidance arrives.

7. The home office, and why your entity changes the answer

This is the deduction where the mechanism depends entirely on how you're organized, and using the wrong mechanism is the whole problem.

If you file a Schedule C, you have two options. The simplified method is $5 per square foot up to 300 square feet, so $1,500 maximum. The actual expense method uses Form 8829 and prorates mortgage interest or rent, utilities, insurance, and repairs by the business percentage of your home, plus depreciation. Actual expenses usually produce a bigger number. The simplified method produces no depreciation, which means no depreciation recapture when you sell the house. For a lot of Bay Area homeowners, that tradeoff favors the simplified method more than a straight comparison of the two deductions suggests.

Either way, the space has to be used regularly and exclusively for business, and it has to be your principal place of business, a place where you meet clients, or a separate structure. Exclusive means exclusive. A desk in the corner of the guest room qualifies. The guest room doesn't.

If you run an S corporation, neither method is available to you directly, for the reason covered in item 1. And you can't work around it by renting the space to your own corporation, because IRC 280A(c)(6) specifically disallows a rental deduction when you're an employee using that space to perform services for that employer. The accountable plan is the answer. The corporation reimburses you for the business-use portion of your home costs, deducts it, and nothing hits your W-2.

The Augusta rule under 280A(g) is a separate and much narrower thing. If you rent your home to your corporation for fewer than 15 days a year, the corporation deducts the rent, and you exclude the income. It's real, but it's for genuine board meetings and company events at documented fair market rates, not for daily office space. The Tax Court gutted a claimed deduction in Sinopoli in 2023 because the taxpayers couldn't support the rate they charged themselves. Treat it as an audit magnet and document it accordingly.

One last point that gets missed entirely. Qualifying your home as your principal place of business converts what would have been nondeductible commuting into deductible business mileage. For a consultant driving to client sites, that's frequently worth more than the home office deduction itself.

8. Your vehicle

Two misunderstandings here, and both are expensive.

First, "100% bonus depreciation is permanent now" does not mean you write off the car. OBBBA restored permanent 100% bonus depreciation for property acquired after January 19, 2025, and that part is true. But a passenger automobile with a gross vehicle weight rating of 6,000 pounds or less is still capped by Section 280F. For a vehicle placed in service in 2026, the first-year limit with bonus is $20,300. Above 6,000 pounds you escape 280F, but Section 179 caps you at $32,000. A $90,000 SUV does not become a $90,000 deduction in year one, whatever the video said.

Second, the 2026 standard mileage rate changed mid-year. It's 72.5 cents per mile through June 30 and 76 cents from July 1 forward. If you're applying one rate for the whole year, your number is wrong. Split the log on June 30.

While we're here: you have to choose the standard mileage rate in the first year the vehicle is used in your business. Miss that year and the vehicle is locked into actual expenses for as long as you own it. You also can't use standard mileage on a vehicle you took Section 179 or bonus depreciation on.

9. S Corp health insurance that never made it to the W-2

This is one of the most expensive small errors I run into, and it's entirely avoidable.

If you own more than 2% of an S corporation, your health insurance premiums have to be paid or reimbursed by the corporation and included in Box 1 of your W-2. They're excluded from Boxes 3 and 5, so there's no added Social Security or Medicare tax. You then claim the self-employed health insurance deduction on Schedule 1, computed on Form 7206.

If the premiums never hit the W-2, Notice 2008-1 says the plan wasn't established by the S corporation, and the deduction under Section 162(l) isn't allowed. It drops to Schedule A as a medical expense behind a 7.5% AGI floor, which for most owners means it's worth nothing at all. Paying $18,000 in premiums off a personal card and never running it through payroll can cost you the entire deduction.

Two related limits. The deduction can't exceed your Medicare wages from that S corporation, so an owner taking distributions and no salary gets nothing. And you lose it for any month you were eligible to participate in a subsidized plan through your own or your spouse's employer. Eligible, not enrolled.

HSA contributions follow the same discipline on a different line. They also have to run through the W-2, but you deduct them on Form 8889 rather than Form 7206.

10. The client who never paid you is not a write-off

Every business owner has an invoice that went unpaid, and most of them expect to deduct it. If you're on the cash basis, you can't.

Section 166 allows a deduction for business debts that become worthless, but 166(b) limits the deduction to your adjusted basis in the debt. On the cash method you never recognized that invoice as income, so your basis in the receivable is zero. IRS Topic 453 says plainly: you can deduct a business bad debt only if the amount was included in your gross income in the current or a prior year.

The logic is fair once you see it. You already got the benefit by never paying tax on money you didn't collect. There isn't a second deduction stacked on top of that. An accrual-basis business is in a different position, because it did report the income and does have basis to write off.

The fix here isn't a tax fix. Deposits up front, clear payment terms in the engagement letter, and stopping work when an invoice ages past your threshold will do more for you than the deduction would have.

What ties these together

Look at what items 1, 4, 7, and 9 have in common. Every one of them turns on entity type. The same dollar, spent by the same person, produces a different tax result depending on whether there's an S election on file and whether the supporting paperwork exists.

That's a useful takeaway. Deductions aren't a checklist you run at the end of the year. They're a function of how you're structured and what you documented while the money was moving. By the time you're sitting down with your return in March, most of these are already decided.

If you're not sure which of these apply to your business, that's a conversation worth having before year end instead of after it. Contact ADL Business Consulting, PC by emailing info@adlbusinessconsulting.com or fill out the free consultation form and we'll walk through your situation.