Running your business on a Schedule C? The right deductions and credits can help shrink your tax bill (if you track costs and claim them correctly!).

Tax season doesn't have to feel like you’re fighting with your calculator while blindfolded. Maximizing sole proprietor tax breaks isn’t so scary when you understand what's deductible, keep clean records, and map each item to the right IRS form. The key is knowing where everything goes and having the documentation to back it up.

This guide explains how sole proprietors are taxed (Schedule C plus Schedule SE), the most common 2025 deductions and credits, and how to actually claim them. You'll also get recordkeeping and planning tips to file confidently and keep more of what you earn.

Whether you're a freelance designer or a consultant looking to make tax time easier, having the right tools makes all the difference. Wave helps sole proprietors capture receipts, categorize expenses, and export tax-ready reports, making deductions and credit claims easy to back up.

How sole proprietor taxes work 

Understanding how your tax forms work prevents costly mistakes and missed deductions. As a sole proprietor, your business isn't a separate tax entity — everything flows through your personal return.

Your business income and expenses live on Schedule C of Form 1040. This is where you'll report your revenue, cost of goods sold (if applicable), and most business deductions. Think of Schedule C as your business profit and loss statement for tax purposes.

Self-employment tax gets computed on Schedule SE using your net earnings from Schedule C. This covers your Social Security and Medicare taxes, the equivalent of what employees and employers split. The current self-employment tax rate is 15.3% on net earnings up to the Social Security wage base.

Correct placement is key, because putting deductions in the wrong spot can trigger audits or cause you to miss out entirely! For example, self-employed health insurance doesn't go on Schedule C; it's an above-the-line deduction on Schedule 1. Equipment purchases might need Form 4562 for depreciation elections. Getting this right from the start saves headaches later.

Make sure you keep business and personal finances separate — the IRS expects clear boundaries! Mixed-use items require documentation, and personal expenses run through business accounts are audit red flags.

What counts as a deduction? 

The IRS allows deductions for expenses that are "ordinary and necessary" for your trade or business. “Ordinary” means common in your industry. “Necessary” means helpful and appropriate for your business, not necessarily indispensable.

Understanding the difference between current and capital expenses determines whether you can deduct something immediately or need to depreciate it over time. Current expenses (office supplies, software subscriptions) get deducted in full the year you pay them. Capital expenses (equipment, vehicles, furniture) typically get depreciated though Section 179;  bonus depreciation can let you expense qualifying items immediately.

Substantiation standards require proper documentation. The IRS expects receipts, invoices, mileage logs, and clear business purposes for claimed deductions. "I think I spent about $500 on office supplies" won't cut it if you get audited!

For mixed-use assets, document your allocation method upfront. If you use your car 70% for business and 30% for personal use, track actual business miles versus total miles driven. For home office deductions, measure the square footage used exclusively for business relative to your total home.

Top sole proprietor deductions to know in 2025

When filing your taxes as a sole proprietor, here are some of the of the top deductions you should know about that you may be able to claim:

• Home office expenses
• Vehicle expenses and mileage
• Equipment
• Startup and organizational costs
• Meals and travel
• Insurance and self-employed health insurance
• Retirement plan contributions
• Rent, utilities, software, and subscriptions
• Education, training, and professional fees
• Interest, bank, and payment processing fees

Home office (Regular vs. simplified method)

The home office deduction can save big bucks if you qualify. You need to use part of your home exclusively and regularly for business, and it must be your principal place of business.

The simplified method lets you deduct $5 per square foot up to 300 square feet (maximum $1,500 deduction). It's easier but may not maximize your deduction if you have high home-related expenses.

The regular method requires calculating the percentage of your home used for business, then allocating utilities, rent or mortgage interest, property taxes, insurance, and repairs accordingly. More paperwork, but potentially bigger deductions.

Keep floor plans, photos, and expense records. Document when you start using the space for business, and any changes you make.

Vehicle expenses and mileage (actual vs. standard rate)

Record the date, destination, business purpose, and miles for each trip right away. Restructuring logs later might cause you to miss out on deductions!

Choose between the standard mileage rate (70 cents per mile for 2025) or actual expenses like gas, repairs, insurance, and depreciation. You generally can't switch methods for the same vehicle, so pick wisely from the start.

Business parking and tolls are deductible regardless of which method you choose. Keep those receipts separate from your mileage calculations.

Equipment, Section 179 and bonus depreciation

Section 179 lets you deduct the full cost of qualifying equipment in the year you buy it, up to certain limits. For 2025, you can generally deduct up to $1,220,000 in qualifying property, though the deduction phases out if you buy more than $3,050,000 worth of equipment.

Bonus depreciation allows immediate write-offs for qualifying property but at a lower percentage — 40% for assets placed in service in 2025. The percentage continues declining until it phases out completely.

Use Form 4562 to make these elections. Missing the deadline means you're stuck with regular depreciation over many years. Consider your current-year income when deciding between Section 179 and bonus depreciation;  big deductions don't help much in low-income years.

Startup and organizational costs

Qualifying pre-opening expenses include market research, legal fees, accounting costs, and business registration fees. You can deduct up to $5,000 in startup costs the first year your business begins, then amortize remaining costs over 15 years.

The $5,000 immediate deduction phases out dollar-for-dollar once total startup costs exceed $50,000. Keep detailed records of what was spent and when; costs incurred after you begin operations aren't startup costs.

Meals and travel

Business meals are generally 50% deductible when there's a clear business purpose. Keep records showing who you ate with, where, when, the business relationship, and what was discussed.

For business travel, deduct airfare, lodging, ground transportation, and incidentals for trips away from your tax home. Keep itineraries, receipts, and documentation of the business purpose. Personal vacation days tacked onto business trips aren't deductible.

Insurance and self-employed health insurance

Business insurance premiums (liability, errors and omissions, cyber coverage) are fully deductible on Schedule C. These protect your business operations and are ordinary and necessary expenses.

Self-employed health insurance gets special treatment; it's deductible above-the-line on Schedule 1 of Form 1040, not on Schedule C. You can only deduct premiums for months when you had net earnings from self-employment and weren't eligible for employer-sponsored coverage through a spouse's job.

Retirement contributions (SEP IRA, SIMPLE IRA, Solo 401(k))

Retirement plan contributions can dramatically reduce your taxable income while building your future security. Solo 401(k)s offer the highest contribution limits, allowing both employee and employer contributions up to annual limits.

SEP IRAs are simpler to set up and maintain, with contribution limits up to 25% of net self-employment earnings. SIMPLE IRAs work well if you have employees, since contribution requirements apply equally to everyone.

Coordinate retirement contributions with your net earnings from self-employment; you can't contribute more than you earned. Set up plans by December 31 to make contributions for that tax year, though you typically have until your tax filing deadline to make the actual contributions.

Rent, utilities, software, and subscriptions

Office rent, co-working space fees, business utilities, cloud-based software, accounting programs, domain names, web hosting, and industry-specific subscriptions are all deductible business expenses.

For utilities in a home office, allocate based on business-use percentage. Software subscriptions are generally deductible in the year paid, while perpetual software licenses might need to be capitalized and depreciated.

Education, training, and professional fees

Courses, certifications, conferences, and training that maintain or improve skills needed in your current business are deductible. Legal and accounting fees related to business operations, tax preparation, and business formation also qualify.

The key is business connection — personal development that doesn't relate to your current trade or profession isn't deductible. Keep programs, receipts, and documentation showing the business relevance.

Interest, bank, and payment processing fees

Business credit card interest, loan interest on business debt, monthly business bank account fees, and payment processing fees from credit card companies or platforms are all deductible.

Interest on loans used to purchase business assets or fund operations qualify, too. Personal loan interest used for business purposes gets tricky; maintain clear records showing the business use of borrowed funds.

Tax credits many sole props miss

In addition to tax deductions, there are tax credits that are available to sole proprietors but are often missed out on. Here are some tax credits that may be available to you.

• Small Employer Retirement Plan Startup credit
• Work Opportunity Tax Credit (WOTC)
• Research & Development (R&D) credit
• Clean Energy & EV credits
• Disabled Access credit

Small Employer Retirement Plan Startup Credit

If you establish a new qualified retirement plan, you might qualify for a credit covering plan setup costs. Recent SECURE Act enhancements added potential per-employee credits for contributions to participant accounts.

The credit applies to ordinary and necessary costs of establishing or administering the plan and educating employees about it. Small employers with 100 or fewer employees who received at least $5,000 in compensation can potentially qualify.

Work Opportunity Tax Credit (WOTC)

Hire employees from certain targeted groups and you might qualify for tax credits. Groups include veterans, ex-felons, SNAP recipients, and others facing employment barriers.

File Form 8850 with your state workforce agency within 28 days of the employee's start date to pre-screen for eligibility. If approved, claim the credit using Form 5884, which flows to Form 3800.

Research and Development (R&D) credit

Sole proprietors conducting qualifying research activities can claim R&D credits using Form 6765. This includes developing new products, processes, or software for your business use.

Qualifying activities must meet the four-part test: technological in nature, intended to be useful in developing a business component, involves a process of experimentation, and relates to a new or improved function, performance, reliability, or quality.

Clean Energy and EV credits

Business use of clean energy equipment and electric vehicles can generate tax credits. Commercial clean vehicle credits under Section 45W and electric vehicle charging equipment credits on Form 8911 are available for qualifying purchases.

Track business-use percentages carefully since personal use portions don't qualify for business credits. Credits might reduce your basis in the property for depreciation purposes.

Disabled Access credit

Small businesses making improvements to enhance accessibility for disabled individuals might qualify for credits on Form 8826. Eligible expenditures include removing architectural barriers, providing sign language interpreters, and purchasing adaptive equipment.

The credit is available to businesses with gross receipts of $1 million or less or 30 or fewer full-time employees in the prior year. Credit flows to Form 3800.

QBI (Section 199A) for Sole Proprietors

The qualified business income deduction can reduce your taxable income by up to 20% of your qualified business income from Schedule C operations. This deduction is available through 2025 under current law.

Specified Service Trade or Business (SSTB) rules limit the deduction for businesses involving performance of services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and other fields where the principal asset is the reputation or skill of employees or owners.

Higher-income taxpayers face W-2 wage and qualified property limitations. The deduction phases out and additional limits apply once taxable income exceeds certain thresholds. Retirement contributions can affect QBI calculations since they reduce net earnings from self-employment.

How to claim deductions and credits 

When claiming tax deductions and credits, you should know which forms are required for you to fill out as a sole proprietor.

Which return you file

File Form 1040 with Schedule C attached for your business income and expenses. Add Schedule SE to calculate self-employment tax on your net earnings from Schedule C.

The attachments that matter

Form 4562 handles depreciation elections, Section 179 expensing, and bonus depreciation. Various credit forms (5884, 6765, 8826, 8936, 8911) flow to Form 3800 if you have multiple business credits.

Schedule 1 of Form 1040 captures above-the-line deductions like self-employed health insurance that don't belong on Schedule C. Keep supporting workpapers that reconcile your books to the tax return lines.

Recordkeeping the IRS expects (Audit-proofing basics)

Receipts and digital storage

Save itemized receipts and invoices showing the amount, date, business purpose, and vendor. Digital storage is acceptable—scan or photograph receipts and organize them by category and date.

Cloud storage provides automatic backup and easy retrieval during audits. Tag receipts with business purposes and allocate mixed-use expenses appropriately in your system.

Mileage logs and home office measurements

Keep mileage logs with date, destination, business purpose, and miles for each trip. GPS apps can help track mileage automatically, but you still need business purpose documentation.

Measure your home office space and total home square footage. Take photos showing exclusive business use and update records when arrangements change.

Substantiation tips and common red flags

Mixed-use assets need clear allocation methods documented upfront. Large first-year write-offs without proper Form 4562 elections raise audit flags. Personal expenses accidentally run through business accounts can disqualify legitimate deductions.

The IRS looks for consistency between lifestyle and reported income. Claiming large deductions relative to income, or having business expenses that seem personal in nature, increases audit risk.

Year-round tax planning for sole proprietors

Quarterly estimated taxes and safe harbors

Avoid underpayment penalties by making quarterly estimated tax payments if you'll owe $1,000 or more when you file. Safe harbor rules let you pay 100% of last year's tax (110% if prior year AGI exceeded $150,000) to avoid penalties regardless of current year income.

Use Form 1040ES to calculate estimated payments covering income tax and self-employment tax on your projected net earnings.

Timing purchases and elections

Year-end equipment purchases can accelerate deductions through Section 179 or bonus depreciation elections. Establish a de minimis safe harbor policy to immediately expense small purchases.

Review your accounting methods annually. Cash vs. accrual method affects when income and deductions are recognized. Consider entity structure changes as your business grows.

Separate accounts and clean books

Use dedicated business bank accounts and credit cards to maintain clear separation between business and personal finances. Reconcile accounts monthly and close your books with clean profit and loss statements and balance sheets.

Wave's receipts feature makes it easier to track and categorize expenses, and maintain clean records year-round. Export tax-ready reports that map directly to Schedule C line items.

Common mistakes to avoid

Don't mix personal and business funds in the same accounts! It makes expense tracking harder and raises audit red flags when personal expenses appear in business records.

Missing Section 179 or bonus depreciation elections means getting stuck with regular depreciation over multiple years. File Form 4562 even if you don't need other depreciation schedules.

Weak documentation kills otherwise legitimate deductions. Save receipts, document business purposes, and maintain detailed mileage logs. Reconstructed records after an audit rarely satisfy IRS requirements.

Remember to take self-employed health insurance deductions on Schedule 1, not Schedule C. This above-the-line deduction reduces both income tax and self-employment tax.

Tools and templates to make tax time easier

Create systems for capturing receipts immediately, whether through apps, folders, or digital scanning. Use mileage tracking apps that automatically log trips and let you add business purposes later.

Establish a capitalization policy defining when purchases get expensed versus depreciated. Set up a simple chart of accounts that maps to Schedule C line items for easier tax preparation.

Wave makes many of these processes easy! You can digitally capture receipts on-the-go, categorize expenses based on merchant and description, tracking mileage, and generating reports that align with tax forms. Wave helps sole proprietors stay organized year-round and avoid the any tax time scrambles!

Frequently asked questions about tax credits and deductions for sole proprietors

Do sole proprietors get more deductions than single-member LLCs?

Tax-wise, there's no difference. Single-member LLCs are "disregarded entities" that file Schedule C just like sole proprietorships. The LLC provides legal liability protection but doesn't change available deductions.

Can I deduct health insurance as a sole proprietor?

‍Yes, if you have net earnings from self-employment and aren't eligible for employer coverage through a spouse's job. The deduction goes on Schedule 1 of Form 1040, not Schedule C.

How does QBI interact with retirement contributions?

‍Retirement contributions reduce your net earnings from self-employment, which can affect QBI calculations. However, the QBI deduction is calculated before retirement contributions, so strategic timing might optimize both benefits.

Can I claim both Section 179 and bonus depreciation in the same year?

‍Yes, you can use both elections for different assets, or combine them for the same asset. Section 179 gets applied first, then bonus depreciation on the remaining basis.

What if I have W-2 income and Schedule C income — how do estimated taxes work?

‍Your W-2 withholding counts toward total tax owed, including self-employment tax from Schedule C income. You might need to make estimated payments or adjust W-4 withholding to cover the additional liability.

Make it without the fake it this tax season

Planning beats procrastination every time. Understanding what's deductible, keeping clean records, and mapping expenses to the right forms turns tax season from a dreaded chore into a strategic advantage.

The difference between taxpayers who maximize their deductions and those who leave money on the table usually comes down to organization and documentation. Start capturing receipts today, set up systems that work year-round, and make tax preparation a part of good business record-keeping.

Ready to get organized? Set up Wave to categorize expenses automatically, capture receipts on-the-go, and export tax-ready reports that make Schedule C preparation straightforward. Your future self — and your tax preparer — will thank you when everything's already organized and backed up.

Manage your money like a pro today! Your tax savings start with that first expense you properly categorize or that first mile you log. 😉