Small Business Tax Deduction Statistics 2026: Write-Offs, Audit Rates, and Compliance

Small businesses claimed over $580 billion in deductions on sole proprietorship returns in Tax Year 2022 alone. Whether you're a freelancer, independent contractor, or small business owner, understanding how deductions work -- and where the IRS focuses its audits -- can save thousands of dollars. This report compiles source-verified statistics on small business tax deductions for journalists, analysts, and business teams.

Key Findings at a Glance

• Sole proprietors filed 31.0 million returns in Tax Year 2022, claiming $580.2 billion in total business deductions (IRS SOI, Sole Proprietorship Returns TY 2022).
• Car and truck expenses represented 13.8% of all sole proprietorship deductions in TY 2022, making it the single largest deduction category (IRS SOI Nonfarm Sole Proprietorship Statistics).
• The IRS standard mileage rate for business use rose to 72.5 cents per mile in 2026, up from 70 cents in 2025 (IRS Notice 2026-10).
• The IRS closed 505,514 audits in FY 2024, recommending over $29 billion in additional tax (IRS Data Book FY 2024).
• Sole proprietors have a net income misreporting rate of 55%, compared to just 1% for wages and salaries (GAO-24-105281).

Total Sole Proprietorship Deductions

Sources: IRS SOI -- Sole Proprietorship Returns, Tax Year 2022; IRS SOI -- Sole Proprietorship Returns, Tax Year 2021

Top Deductions by Category

For Schedule C (sole proprietorship) filers, the largest categories of business deductions in TY 2022 were:

• The construction sector reported the largest share of total sole proprietorship deductions at 19.3% of all deductions (IRS SOI Nonfarm Sole Proprietorship Statistics).

Source: Big Ideas for Small Business -- SOI Analysis; IRS SOI Nonfarm Sole Proprietorship Statistics

Self-Employment Tax Deductions

• Self-employment tax rate: 15.3% (12.4% Social Security + 2.9% Medicare). The deductible portion is 50% of self-employment tax paid (IRS -- Self-Employment Tax).
• 2026 Social Security wage base: $176,100+ (up from $168,600 in 2024 and $176,100 in 2025).
• Section 199A (QBI) deduction: In TY 2022, 25.6 million tax units claimed $216 billion in qualified business income deductions. The One Big Beautiful Bill Act (signed July 2025) made the 20% QBI deduction permanent and increased it to 23% beginning in 2026 (Tax Foundation).
• The QBI deduction reduces federal tax revenues by an estimated $57.6 billion in 2024 and $60.9 billion in 2025 (JCT estimate).
• More than 25.9 million businesses claimed a 199A deduction on TY 2021 returns, supporting over 2.6 million workers and generating $325 billion of GDP annually (NFIB).

Home Office Deduction

• Simplified method rate: $5 per square foot, up to 300 sq ft, for a maximum deduction of $1,500 (unchanged since 2013) (IRS -- Simplified Option for Home Office Deduction).
• Only self-employed individuals, independent contractors, and business owners qualify. W-2 employees cannot claim this deduction (the TCJA eliminated the unreimbursed employee expense deduction through 2025).
• In TY 2023, approximately 8.2 million EITC returns reported at least one Schedule C, most representing small, often home-based businesses (IRS EITC Due Diligence).

Vehicle and Mileage Deductions

• For 2025, 33 cents per mile of the business standard mileage rate is treated as depreciation.
• The average mileage claim by the standard mileage method is approximately $5,500 per year for self-employed individuals, translating to roughly 7,857-8,209 business miles annually (Driversnote).
• Section 179 deduction limit (2024): $1,220,000 maximum, with phase-out beginning at $3,050,000 in qualifying property.

Sources: IRS -- Standard Mileage Rates; IRS Notice 2026-10

Meal and Entertainment Deductions

• 2023-2025: Business meals are 50% deductible (the temporary 100% restaurant meal deduction from 2021-2022 expired).
• Entertainment expenses: 100% nondeductible since 2018 (the TCJA eliminated the deduction).
• Key 2026 changes under the One Big Beautiful Bill Act:
  • Business meals with clients/associates: remain 50% deductible
  • Meals during training/company meetings: no longer deductible
  • Meals provided on premises for employer convenience: no longer deductible
  • Company-wide events (holiday parties, picnics): remain 100% deductible

Sources: RSM -- Business Meals and Entertainment; Baker Tilly -- 2026 Meal Deduction Guidance

Deduction Error Rates and Misreporting

• IRS math error notices (TY 2023): Over 1 million notices for more than 1.2 million mistakes, with the biggest errors involving income tax calculation, including self-employment taxes (IRS Data Book Table 25).
• Sole proprietor net income misreporting rate: 55% (TY 2014-2016), compared to just 1% for wages and salaries. At least 61% of sole proprietors underreported net business income (GAO-24-105281).
• EITC improper payment rate: Between 22% and 26% of EITC payments, costing $13.3 to $15.6 billion annually (Tax Policy Center).
• In GAO undercover visits to 19 randomly selected paid tax preparers, only 2 of 19 (10.5%) calculated the correct refund amount (GAO-14-467T).

Small Business Audit Rates

• The IRS closed 505,514 audits in FY 2024, recommending over $29.0 billion in additional tax.
• 77.9% were correspondence audits (393,783 audits; $6 billion recommended).
• 22.1% were field audits (111,713 audits; $23 billion recommended).
• The Small Business/Self-Employed Division increased its revenue agent staffing by 22% in FY 2024.

Sources: IRS Data Book FY 2024; IRS Press Release

Tax Gap Data

• The IRS projected the gross tax gap at $696 billion for TY 2022, up from $688 billion in TY 2021.
• Breakdown: Underreporting $539 billion (77%), Underpayment $94 billion (14%), Non-filing $63 billion (9%).
• Of $381 billion in individual income tax underreporting, $194 billion was attributable to pass-through business income.
• Sole proprietor underreporting accounts for approximately $80 billion in unpaid taxes annually, representing 16% of the total tax gap (GAO-24-105281).
• The voluntary compliance rate remains approximately 85% (IRS Tax Gap Projections TY 2022).

Section 179 and Bonus Depreciation

Section 179 Deduction Limits

Source: Section179.org

Bonus Depreciation Schedule

• 2022: 100% bonus depreciation (last year at full rate under TCJA)
• 2023: 80% bonus depreciation
• 2024: 60% bonus depreciation
• 2025: 40% bonus depreciation (pre-OBBBA)
• 2026+: 100% restored under the One Big Beautiful Bill Act (OBBBA), signed into law in 2025 (Plante Moran)
• The Joint Committee on Taxation estimated bonus depreciation costs the federal government approximately $90 billion per year; Section 179 costs approximately $22 billion per year (Treasury Working Paper 110).

Partnership and S-Corp Deduction Data

Partnership Statistics (Tax Year 2023)

• The finance and insurance sector reported the largest shares: 54.2% of passthrough income, 58.8% of total assets, and 24.0% of total receipts.
• Limited partnerships: 9.7% of all partnerships but accounted for 32.8% of all pass-through income.
• S corporations are the most prevalent type of corporation in the U.S.

Sources: IRS SOI -- Partnership Returns, TY 2023; IRS SOI -- Partnership Statistics

Gig Economy and Freelancer Deductions

• Over 70 million Americans now participate in freelance work, representing approximately 36% of the total U.S. workforce (ADP Research).
• Full-time independents (15+ hrs/week) grew 6.5% to 27.7 million in 2024 (from 26 million in 2023), representing 16.7% of the 165 million Americans in the workforce.
• Independents earning over $100,000 annually rose to 4.7 million in 2024 (from 3 million in 2020).
• Projections: 86.5 million freelancers by 2027 (more than half the workforce) (The Interview Guys).

1099-K Threshold Changes

• The IRS estimates the lowered threshold impacted approximately 20 million people over two years.
• 61% of gig workers did not know the 1099-K threshold was lower. Over 20% planned to quit one or more gig economy jobs to avoid crossing future thresholds (Avalara).
• The OBBBA (signed July 2025) retroactively reinstated the $20,000 / 200 transaction threshold (IRS).

Small Business Formation Trends

• 21 million cumulative new business applications filed between 2021-2024 -- over 90% faster than pre-pandemic averages (SBA; Census Bureau BFS).

Updated SBA Small Business Counts (2025)

• Small businesses created approximately 9 out of every 10 net new jobs from March 2023 to March 2024 (SBA Advocacy).

Digital Record-Keeping vs. Paper Receipts

• Only 34% of merchants currently offer digital receipt options, despite 89% of Americans wanting retailers to offer them (Green America).
• Global digital receipt market: $2.1 billion in 2023, projected to reach $5.1 billion by 2033 (CAGR 11.5%) (Market.us).
• The U.S. consumes more than 250,000 tons of thermal paper for receipts annually.
• QuickBooks holds 62.23% market share in accounting software; over 7 million small-to-mid-sized businesses use it globally (ElectroIQ).
• 95% of accounting firms adopted automation technologies in the past year. 64% of firms plan to invest in or upgrade AI (up from 48% in 2023) (Intuit QuickBooks).
• Consumer preference: 50% of consumers aged 55+ prefer paper receipts, compared to under 30% of ages 16-24 (Retail Dive).

If you found this data useful, please cite as: "Small Business Tax Deduction Statistics 2026," makemyreceipt.com, February 2026.

Methodology and Sources

All statistics in this report are sourced from publicly available government reports and press releases. Primary sources include:

• IRS SOI: Sole Proprietorship Returns, Tax Year 2022 and Nonfarm Sole Proprietorship Statistics.
• IRS Data Book FY 2024: Publication 55B and FY 2024 Press Release.
• GAO: GAO-24-105281 -- Sole Proprietor Compliance.
• IRS Tax Gap: Tax Gap Projections for Tax Year 2022.
• SBA: 2024 Small Business Profile and 2025 Small Business Report.
• Tax Foundation: 199A Deduction Analysis.
• NFIB: QBI Deduction Impact Study.
• Census Bureau: Business Formation Statistics.
• IRS SOI: Partnership Returns, TY 2023.
• FDIC / Green America: Digital Receipts and Consumer Preferences.

Last updated: February 2026.