Small Business Tax Incentives: QBI, Bonus Depreciation, and Credits

Federal small business tax incentives fall into two broad buckets: credits that cut your tax bill dollar-for-dollar (for hiring, research, retirement plans, health coverage, childcare, and accessibility), and deductions or accelerated cost-recovery rules that let you write off income, equipment, and property faster (the Qualified Business Income deduction, bonus depreciation, Section 179, startup costs, home office, and mileage). Most of the major ones were reshaped by the One Big Beautiful Bill Act, signed July 4, 2025, which made several expiring provisions permanent and enlarged others aimed specifically at smaller employers.¹

The Qualified Business Income Deduction for Pass-Through Owners

If you own a sole proprietorship, partnership, S corporation, or certain trusts, the Section 199A deduction lets you subtract a percentage of your qualified business income on your individual return.² The 2025 law made this deduction permanent for tax years beginning after December 31, 2025, and raised the rate from 20% to 23%.³

A new minimum deduction of $400 applies to taxpayers with at least $1,000 in aggregate qualified business income from businesses they materially participate in. Both dollar figures start adjusting for inflation in 2027.⁴ The phase-in window for the wage and property limits also widened: from $50,000 to $75,000 above the threshold for single filers, and from $100,000 to $150,000 for joint filers.⁵

One boundary matters here. If your business is a specified service trade or business (law, accounting, consulting, financial services, performing arts, and similar fields), the deduction still phases out entirely once income passes the upper end of the phase-in window.³ Income earned through a C corporation or as an employee doesn’t qualify at all.²

Writing Off Equipment and Property Faster

Two provisions let you recover the cost of assets much faster than ordinary depreciation, and both got bigger in 2025.

100% Bonus Depreciation, Back Permanently

Bonus depreciation had been phasing down under the original 2017 law: 80% in 2023, 60% in 2024, 40% in 2025, heading to zero by 2027. The One Big Beautiful Bill Act permanently restored the full 100% first-year deduction for qualified property acquired and placed in service after January 19, 2025.⁶ The law also created an elective 100% deduction for “qualified production property,” meaning nonresidential real property used in manufacturing or production, placed in service before January 1, 2031, if construction began between January 19, 2025, and January 1, 2029.⁵

Section 179 Expensing, Doubled

Section 179 lets you deduct the full price of qualifying equipment and property in the year you place it in service. For tax years beginning after December 31, 2024, the maximum deduction is $2.5 million, with a dollar-for-dollar phase-out starting at $4 million of qualifying purchases. Both figures adjust for inflation after 2025; for 2026 they run about $2,560,000 and $4,090,000.⁶⁷

Qualifying property includes equipment, machinery, computers, off-the-shelf software, office furniture, business vehicles (subject to separate depreciation limits), and certain improvements to nonresidential real property such as roofing, HVAC, and security systems. It has to be used more than 50% for business and placed in service during the tax year. Unlike bonus depreciation, the Section 179 deduction can’t exceed your taxable business income, though the excess carries forward.⁷

Research and Development: Credit, Payroll Offset, and Immediate Expensing

The Section 41 R&D credit gives a dollar-for-dollar tax cut for qualified research expenses, including wages for research employees, supplies, and contract research. The activity has to meet a four-part test: qualified purpose, technological uncertainty, a process of experimentation, and technological in nature.⁸

Payroll Tax Offset for Startups

Startups with little or no income tax liability can apply up to $500,000 per year of the R&D credit against payroll taxes instead: up to $250,000 against the employer’s share of Social Security tax and up to $250,000 against Medicare tax. To qualify, gross receipts must be under $5 million in the current year, and you can have no gross receipts for any year before the five-year period ending with the credit year. Make the election on Form 6765 with a timely income tax return, then claim the credit quarterly on Form 8974 attached to Form 941.⁹

Immediate Expensing of Domestic R&D Costs

Since 2022, the 2017 law had required businesses to capitalize and amortize domestic research costs over five years. New Section 174A permanently restores immediate expensing for domestic research and experimental costs for tax years beginning after December 31, 2024. Foreign research still has to be amortized over 15 years.¹⁰

There’s retroactive relief too. Small businesses with average annual gross receipts of $31 million or less can amend 2022 through 2024 returns to restore immediate deductions for domestic R&E expenses from those years, with the election due before July 2026. Larger businesses can elect to accelerate any remaining unamortized 2022–2024 domestic R&E either entirely in 2025 or split between 2025 and 2026.¹⁰¹¹

Hiring and Paid Leave Credits

Work Opportunity Tax Credit (Currently on Hiatus)

The Work Opportunity Tax Credit rewards employers who hire from ten targeted groups facing barriers to employment: veterans, formerly incarcerated individuals, SNAP or SSI recipients, the long-term unemployed, and others. The standard credit is 40% of the first $6,000 in wages for a qualifying employee who works at least 400 hours in the first year, so up to $2,400 per hire. Certain qualified veterans can generate a credit on up to $24,000 in wages. Employees who work 120 to 400 hours produce a reduced 25% credit.¹²

Authorization expired December 31, 2025. As of mid-2026 the program is in hiatus pending congressional reauthorization, and state workforce agencies are accepting and holding applications for employees with start dates of January 1, 2026 and later in case Congress reauthorizes it retroactively.¹³ If you’re hiring from a targeted group now, keep filing the paperwork.

Employer Credit for Paid Family and Medical Leave

Section 45S gives employers that voluntarily offer paid family and medical leave a credit worth 12.5% to 25% of the wages paid during leave, for up to 12 weeks per employee per year. The minimum applies if you pay at least 50% of normal wages, and the rate rises by 0.25 percentage points for each point above that floor. The One Big Beautiful Bill Act made this credit permanent starting in 2026. Qualifying employees can’t have earned more than 60% of the highly compensated employee threshold in the prior year, roughly $96,000 in 2025.¹⁴¹⁵

Health, Retirement, and Childcare Credits

Small Employer Health Care Tax Credit

If you cover health insurance through the Small Business Health Options Program (SHOP) Marketplace, you can claim a credit worth up to 50% of the premiums you pay (35% for tax-exempt employers). To qualify, you need fewer than 25 full-time equivalent employees, average annual wages below an inflation-adjusted threshold (about $65,000 in recent guidance), and you must contribute at least 50% of employee-only premium costs. The credit is largest for businesses with fewer than 10 employees earning around $27,000 or less on average, and it can be claimed for two consecutive tax years using Form 8941.¹⁶¹⁷

Retirement Plan Credits Under SECURE 2.0

SECURE 2.0 layered several credits for small employers starting a plan:

Startup cost credit. Employers with 50 or fewer employees can claim 100% of eligible plan startup costs (setup, administration, employee education), up to $5,000 per year for three years. Employers with 51 to 100 employees get a 50% credit.¹⁸
Auto-enrollment credit. Adding an automatic enrollment feature to a new or existing plan generates an extra $500 per year for three years.¹⁸
Employer contribution credit. Small employers get a credit for contributions made for employees earning $100,000 or less, up to $1,000 per employee per year: 100% in years one and two, 75% in year three, 50% in year four, 25% in year five. For employers with 51 to 100 employees, the credit drops by 2% for each employee above 50.¹⁸

Eligible employers need 100 or fewer employees who received at least $5,000 in compensation in the preceding year, and must not have offered a substantially similar plan to the same employees in the prior three years.¹⁸

Employer-Provided Childcare Credit

Section 45F was substantially expanded for tax years 2026 and later. The maximum credit rose from $150,000 to $500,000 per year, and eligible small businesses (those with average annual gross receipts of $32 million or less over the preceding five years) can claim up to $600,000. The credit rate on qualifying childcare expenditures went from 25% to 40% for most employers and 50% for eligible small businesses. The 10% rate for childcare resource and referral expenditures is unchanged. Qualifying expenses cover acquiring or operating a childcare facility and contracting with qualified facilities to provide care for employees.¹⁹

Accessibility: The Disabled Access Credit and Barrier Removal Deduction

Small businesses that spend money making a location accessible can claim the Disabled Access Credit on Form 8826. The credit is 50% of eligible expenditures between $250 and $10,250 per year, capping the annual credit at $5,000. Qualifying costs include removing architectural barriers, providing interpreters or readers, and acquiring or modifying adaptive equipment.²⁰ To qualify, you need gross receipts of $1 million or less, or no more than 30 full-time employees, in the preceding year.²¹

Separately, any business can claim a barrier removal deduction of up to $15,000 per year for removing architectural and transportation barriers. You can use the credit and the deduction in the same year on the same project, but the deduction is reduced by the amount of the credit you claim.²²

Everyday Deductions Worth Knowing

Startup and Organizational Costs

Under Section 195, a new business can deduct up to $5,000 in startup costs (market research, site selection, advertising, professional fees) in its first year. That $5,000 phases out dollar-for-dollar once total startup costs pass $50,000, and disappears completely at $55,000. Anything left over is amortized over 180 months starting in the month the business opens.²³ Corporations have a parallel $5,000/$50,000 structure for organizational expenses like incorporation fees and legal costs.²⁴

Home Office

If you use part of your home exclusively and regularly as your principal place of business, you can deduct a share of rent, utilities, insurance, mortgage interest, and depreciation. The regular method allocates actual expenses by the business-use square footage on Form 8829. The simplified method is a flat $5 per square foot up to 300 square feet, capped at $1,500 per year.²⁵

Business Mileage

For a vehicle used for work, you can deduct either actual expenses or the IRS standard mileage rate. For 2026, the standard rate is 72.5 cents per mile, up 2.5 cents from 2025. It applies to cars, vans, pickups, and panel trucks regardless of fuel type.²⁶

How the Credits Combine on Form 3800

Most federal business credits (R&D, WOTC, childcare, disabled access, retirement plans, and more) flow through Form 3800, the General Business Credit. That form adds up all your individual credits and determines how much you can actually apply to tax in a given year.²⁷

Credits apply in a set order: carryforwards from the earliest prior year first, then current-year credits, then carrybacks. The total is generally capped at your net income tax minus the greater of the tentative minimum tax or 25% of net regular tax liability above $25,000. Anything over the cap carries back one year and forward 20 years. If a credit is still unused after the 20-year carryforward, Section 196 lets you convert the expired credit into a deduction.²⁷²⁸

Programs That No Longer Take New Claims

Two areas often come up in searches but no longer work the way people expect.

The Employee Retention Credit covered qualified wages paid between March 13, 2020, and December 31, 2021. The filing deadlines for both the 2020 and 2021 periods have passed, so no new claims can be filed. The IRS is still processing roughly 400,000 outstanding claims worth about $10 billion under close review because of widespread improper claims. Employers who submitted ineligible claims can use the IRS withdrawal program to avoid audits, penalties, and interest, as long as the credit hasn’t been paid or the refund check cashed.²⁹³⁰

Opportunity Zone investing is still active but has a hard clock: gains deferred through Qualified Opportunity Funds are recognized when the investment is sold or on December 31, 2026, whichever comes first. Investors who hold a QOF investment for at least ten years can exclude the appreciation that accrued after their original investment. The 2025 law permanently renewed and enhanced the program.³¹³²

Check Your State

Most states run their own credits and exemptions on top of the federal programs, and they vary widely. New York, for example, offers START-UP NY (up to ten years tax-free for eligible new businesses), the Excelsior Jobs Program for job creation, R&D and capital investment, plus credits for apprenticeships, employee training, veterans, employees with disabilities, and childcare, along with sales tax exemptions on manufacturing equipment and commercial solar.³³ California offers the California Competes Tax Credit, the New Employment Credit for hiring in designated areas, a state R&D credit, and partial sales and use tax exemptions on manufacturing and R&D equipment, along with loan guarantee programs.³⁴ Check your state revenue or economic development agency for the equivalent list where you operate.

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