How Do Tax Deductions Work? A Simple Explanation for Business Owners

Every January I get calls from contractors, salon owners, and consultants in Spring and Cypress asking whether they should “buy something before year-end for the deduction.” Half the time, the purchase doesn’t make financial sense. The other half, they think a deduction is a magic coupon that cuts their tax bill dollar-for-dollar. It doesn’t work that way.

Let me break it down the way I do over coffee at my office.

What Is a Tax Deduction?

A tax deduction shrinks the income number the IRS uses to calculate what you owe. That’s it. It’s not a dollar-for-dollar reduction of your tax bill.

You run a plumbing business and pull in $200,000. You claim $50,000 in actual expenses. The IRS taxes you on $150,000, not $200,000. What you actually save depends on your tax bracket.

Real Numbers

I had a client in Katy, a HVAC contractor, who was in the 24% tax bracket. He paid $10,000 for a commercial office space for the year.

• Income dropped by $10,000
• His actual tax savings was $10,000 x 24% = $2,400

The deduction saved him $2,400. Not $10,000. This is why I tell every client who wants to “spend money for the deduction”: if you don’t actually need it, don’t buy it. You’ll lose money on the deal.

Deductions vs. Credits: They’re Not the Same Thing

People throw these terms around like they’re interchangeable. They’re not.

	Tax Deduction	Tax Credit
What it reduces	Taxable income	Tax owed (dollar-for-dollar)
Value depends on	Your tax bracket	Face value of the credit
Example	$5,000 deduction at 24% = $1,200 saved	$5,000 credit = $5,000 saved

A $5,000 credit cuts your tax bill by $5,000. No brackets involved. A $5,000 deduction saves you somewhere between $600 and $1,850 depending on whether you’re in the 12% or 37% bracket.

Credits are worth more per dollar. But deductions are what you’re going to see most often with business expenses. That’s why understanding them matters.

Refundable vs. Non-Refundable Credits

Some credits can actually put money in your pocket. The Earned Income Tax Credit is refundable, meaning if your credit is bigger than your tax bill, the IRS sends you a check. Non-refundable credits just bring your bill down to zero and stop there.

For business owners in the Houston area, the Small Business Health Care Tax Credit matters if you’re buying health coverage for employees. The Research & Development Tax Credit is gold if you’re in software or engineering. I’ve watched multiple companies in the Heights leave thousands of dollars on the table because they didn’t think they qualified. Most of them did.

How Deductions Flow Through Your Tax Return

The path your deductions take depends on how you structured your business.

Sole proprietors and single-member LLCs list business income and expenses on Schedule C of their personal 1040. Every business expense you claim reduces your net profit. That reduced number is what the IRS taxes.

S-Corps and partnerships file their own returns (Form 1120-S or 1065). Deductions reduce the income that flows through to each owner’s K-1. You report that reduced number on your personal 1040.

C-Corps deduct on Form 1120. The corporate tax rate is 21% flat.

The principle doesn’t change: deductions shrink the income number before the tax rate applies.

Deductions Houston Business Owners Miss All the Time

The IRS allows “ordinary and necessary” expenses. Translation: things that are normal in your industry and actually help you run the business (IRS Publication 535). Everyone knows about payroll, rent, and office supplies. Here’s what I see people leave behind.

Home Office

Working from a dedicated office in your home? You can deduct part of your housing costs. The simplified method is $5 per square foot up to 300 square feet. That’s $1,500 max. The regular method calculates actual expenses based on what percentage of your home the office takes up (IRS Publication 587).

I had a consulting client in the Heights with an office that was 16% of the house. With Harris County property taxes running about $2,300 per $100,000 of home value, that regular method was deducting roughly $3,600 a year in property taxes alone, plus utilities and insurance. The simplified method would’ve only been $800 for a 160 square foot office.

Vehicle Expenses

Houston is built for driving. If your work takes you to job sites or client offices, you can deduct either actual expenses or the IRS mileage rate of 70 cents per mile for 2025. A contractor I worked with was driving from Katy to Pasadena doing HVAC installs. He logged 22,000 business miles that year. That’s $15,400 in deductions just from driving.

Retirement Contributions

If you’ve got your own business, you can contribute to a SEP-IRA, SIMPLE IRA, or Solo 401(k). A SEP-IRA lets you put away 25% of net business earnings up to $70,000 for 2025 (IRS limits). You reduce your tax bill and build retirement savings in the same move.

I’m always surprised how many self-employed owners haven’t opened a retirement account. It’s one of the best deductions out there.

Health Insurance Premiums

Self-employed people who don’t have access to a spouse’s plan can deduct 100% of health insurance premiums for you, your spouse, and your dependents. It’s an above-the-line deduction, which means you get it even if you take the standard deduction (IRS).

Professional Services

What you pay an attorney, accountant, bookkeeper, or consultant for business work is deductible. All of it. Yes, that includes what you pay us at EZQ Group.

Depreciation

Equipment, vehicles, and furniture usually get deducted over multiple years through depreciation. Section 179 changes the game. It lets you deduct the whole price in year one, up to $1,250,000 for 2025 (IRS Section 179). If you bought a $12,000 piece of equipment, you can write it off entirely in 2025.

The QBI Deduction

This one matters if you own a pass-through business (LLC, S-Corp, partnership). Section 199A lets you deduct up to 20% of qualified business income. A client with a $150,000 in QBI gets a $30,000 deduction. At the 24% bracket, that’s about $7,200 in tax savings.

There are income limits if you own a service business. Phase-out starts at $197,300 for single filers and $394,600 for joint filers in 2025 (IRS QBI FAQs). The rules have enough moving parts that professional help usually pays for itself.

Standard Deduction vs. Itemized: A Common Confusion

For 2025, the standard deduction is $15,000 for single filers and $30,000 for married filing jointly (IRS).

Here’s what confuses people: your business deductions don’t care about this choice. You take all your Schedule C business expenses first. Then separately, you decide whether to take the standard deduction or itemize personal stuff like mortgage interest and charitable giving.

A sole proprietor deducts every business expense on Schedule C, then chooses standard or itemized for personal deductions. Two separate parts of the return.

Record-Keeping: No Records, No Deduction

The IRS denies deductions without proof. They want the amount, the date, the business purpose, and who it was for (IRS Publication 463).

That means:

• Receipts for all purchases over $75 (honestly, keep them all)
• Mileage logs with dates, destinations, and business purpose
• Bank and credit card statements showing the payment
• Written records of home office square footage

Use a cloud app like Wave or QuickBooks. Snap photos of receipts the day you buy something. Do it consistently throughout the year. Don’t wait until March to sort it out.

Deductions Are a Strategy, Not a Checklist

Individual deductions help, but the real money comes from planning them as part of a bigger strategy. Timing equipment purchases, picking the right retirement account, understanding how your business income moves you between tax brackets. These things compound over years.

You already have Texas working for you. No state income tax. Harris County has over 400,000 active businesses (U.S. Census Bureau). Add smart federal deduction planning to that advantage, and you keep significantly more money.

Get Help When the Rules Get Complicated

Tax law changes every year. Limits adjust for inflation, Congress rewrites rules mid-year, and self-employment taxes add complexity that generic advice can’t cover.

A good tax professional finds deductions specific to your business, recommends timing strategies, and keeps you out of trouble. They pay for themselves through the money they save you.

At EZQ Group, we build tax plans for Houston small businesses that work beyond tax season. Entity structure, deduction tracking, year-round planning. The goal is keeping more cash in your business. Learn more about our tax planning services.