Small business tax deductions in the US: what a foreign-owned company can write off, and the filing rule that protects it

American tax law is generous with business deductions. Equipment can be written off in the year you buy it, start-up costs are partly deductible from day one, and the One Big Beautiful Bill Act of July 2025 made several of the most valuable provisions permanent. For a European owner there is a catch that domestic guides never mention: a nonresident or a foreign corporation only gets its deductions if it files a true and accurate return on time.

The test every deduction has to pass

The starting point is one sentence in section 162 of the Internal Revenue Code: a business may deduct all the ordinary and necessary expenses paid or incurred during the year in carrying on a trade or business. Ordinary means common and accepted in your line of business. Necessary means helpful and appropriate, not indispensable. A Texas software company may deduct cloud hosting, a trade show booth and its accountant; it may not deduct the owner's family holiday.

Two practical consequences follow. First, keep the evidence: an invoice, a receipt and a note of the business purpose for every expense that is not obvious from the receipt itself. Second, keep business and private money apart. A separate US business bank account and monthly bookkeeping are the cheapest audit protection there is, and our page on bookkeeping for a US LLC shows how to set it up.

Some payments are never deductible, however business-related they feel. Fines and penalties paid to a government for a violation of law are excluded by section 162(f), and lobbying and political campaign spending are excluded by section 162(e). Entertainment, discussed below, is excluded too.

Which return carries your deductions

A deduction only helps if it reduces income that the US actually taxes. Where it lands depends on how your US business is structured:

For a nonresident, deductions are allowed against income that is effectively connected with a US trade or business. Expenses of your European business stay in Europe. If you are not sure whether your LLC has effectively connected income, start with our pages on Form 5472 and the Form 1040-NR.

The timely filing rule for foreign owners

Under the Treasury regulations, a nonresident alien individual is allowed deductions and credits only if a true and accurate return for the year is filed on a timely basis. For a nonresident who filed the prior year's return, or who is filing for the first year a return is required, "timely" means within 16 months of the normal due date. For a foreign corporation the window is 18 months. If no return was filed for the previous year, the deadline is the earlier of that date and the date on which the IRS sends a notice about the missing return.

Miss the window and the IRS can tax your gross effectively connected income, with no deduction for rent, wages or cost of goods. The deadlines can be waived only if the taxpayer acted reasonably and in good faith; someone who knew of the obligation and chose not to file does not qualify.

We ask every client to file every year, on time, even in a loss year and even when no tax seems due. If returns are already overdue, act before the IRS writes to you. Our page on filing late US tax returns explains the catch-up process.

Equipment and property: write it off now

The United States lets businesses deduct most equipment immediately instead of depreciating it over years. Two provisions do the work, and a third handles small purchases.

The section 179 deduction is limited to the taxable income from the active conduct of your trades or businesses; bonus depreciation has no such business income limit. That is why advisers often combine them. Laptops, furniture, machines, vehicles used for business and many building improvements qualify; land never does. Remember that a deduction now means no depreciation later, and that if business use of an expensed asset drops to 50 percent or less, or you sell it, part of the deduction can come back as ordinary income.

Everyday operating expenses

Most deductions are unglamorous, and that is where the money is. For a small US company the usual list looks like this:

• Wages, bonuses and benefits for employees, including employer payroll taxes and health and retirement contributions. Timing matters for year-end bonuses; our guide to employee bonuses and benefits explains the two and a half month rule.
• Contractors. Payments to independent contractors are deductible; for payments made in 2026 the Form 1099-NEC reporting threshold rises to $2,000 from $600.
• Rent, utilities and office supplies, from the lease to printer paper and postage.
• Software, subscriptions and hosting.
• Insurance such as general liability, professional liability and property cover.
• Professional fees for accounting, legal work and registered agent services.
• Advertising and marketing, including online ads and trade shows.
• Bank and payment processing fees, and interest on business loans, subject to the business interest limitation for larger companies.
• Business travel away from home: airfare, hotels and local transport for the business days of the trip.
• Research and development. Since tax years beginning after 2024, domestic research and experimental costs can again be deducted in the year paid or incurred under new section 174A. Foreign research must still be amortised over 15 years, which matters for European groups that do their development at home and charge it to the US company.

Meals, entertainment, gifts and cars

This is where European habits and American rules diverge most.

• Business meals are generally 50 percent deductible under section 274(n), provided the meal is not lavish and the business purpose is documented.
• Entertainment is not deductible at all. Tickets to a Longhorns game or a round of golf with a client cost the full price after tax, even if the deal was closed on the eighteenth green.
• Meals at the workplace. For amounts paid after December 31, 2025, section 274(o) denies the deduction for operating an employee eating facility and for meals provided for the employer's convenience, subject to exceptions.
• Business gifts are deductible up to only $25 per recipient per year under section 274(b). A bottle of wine for a valued customer may cost more than you can deduct.
• Vehicles. You can deduct actual costs for the business share, or use the standard mileage rate. For 2026 the IRS set the business rate at 72.5 cents a mile from January 1 to June 30 and 76 cents from July 1 to December 31 (it was 70 cents for 2025). Keep a mileage log either way.

Home office and start-up costs

Many European founders run their US company from home in the first year. If part of your home is used regularly and exclusively for business, you can deduct it. The IRS simplified method allows $5 per square foot for up to 300 square feet, so at most $1,500 a year, without tracking actual costs. The regular method uses the actual share of rent or mortgage interest, utilities and insurance, and can be larger. A spare room that doubles as a guest room does not qualify.

Costs incurred before the business opens are start-up expenditures under section 195: market research, travel to scout locations, pre-opening advertising and training. The business can elect to deduct up to $5,000 in the year it begins, reduced dollar for dollar by the amount by which total start-up costs exceed $50,000. The remainder is deducted evenly over 180 months. A worked example:

Tax checkups you can do any time of year

Deductions are won in the books, not in March. These checkups work in any month:

1. Reconcile the bank accounts and categorise every transaction. Unexplained transfers between you and the company are the classic audit question.
2. Review your entity choice. Profits, losses and plans change. A disregarded LLC, an LLC taxed as a corporation and a C corporation treat deductions and distributions very differently.
3. Plan large purchases. Equipment placed in service before your year end can be expensed this year under Section 179 or bonus depreciation.
4. Check estimated tax payments so that a profitable year does not end with penalties on top of the tax.
5. Collect W-9 forms from contractors when you engage them, not in January when Forms 1099 are due.
6. Look at the state side. State rules differ. Texas, for example, has no corporate income tax but a franchise tax on margin, and most small companies owe nothing while still filing every year; see our guide to the Texas franchise tax.
7. Diarise the filing deadlines. For a foreign owner, the timely return is the deduction.

An overview of all federal filing duties for companies is on our page on US taxes for companies.