Federal employee with a side hustle? Discover small business tax deductions! Learn about business tax write-offs & deductions available for your small business.
Federal Employee with Side Hustle? Learn about Small Business Tax Deductions
For federal employees who operate a small business on the side, itemized tax deductions can significantly reduce taxable income, allowing small business owners to retain more of their hard-earned money. From home office expenses to business-related travel and supplies, knowing which expenses are tax deductible can provide financial relief and enhance the overall profitability of the enterprise. This article will explore the various tax deductible items available for small business owners, including the changes that were included in the recent “big, beautiful bill” providing insights into how federal employees can effectively navigate their dual roles while optimizing their tax situation.
Learn about federal employee retirement benefits, sign up for a free FERS webinar.
Key Changes to Itemized Deductions Included in “Big” Bill
After the passage of the recent budgetary bill, there were several adjustments made to taxation law that would impact federal employees who operate a small business outside of their government occupation and federal retirees who started a small business after their career in public service. Here’s a breakdown of deductible expenses as a business expense.
SALT Deduction Cap Increased
Many small businesses are “pass-through” entities, meaning profits from the business flow through to the personal tax return. When this occurs, there is a cap on the amount of state and local taxes (SALT) that can be deducted. Before 2018, there was no limit on how much can be deducted. The 2018 Tax Cuts and Jobs Act (TCJA) created a cap of $10,000. The recent legislation temporarily increased this to $40,000 for tax years 2025 through 2029, with a phaseout for high earners.
New Floor for Deducting Charitable Contributions
Beginning in tax year 2026, deductions for charitable donations have to be at least 0.5% of a business owner’s adjusted gross income (AGI) before they qualify for itemized deduction. This means with an AGI of $200,000, any donation of $1000 or less cannot deducted on your tax return. Cash contributions to charities over 60% of one’s AGI cannot be deducted over that limit. This rule has been in place but the recent bill made it permanent.
More Temporary Changes to IRS Rules from TCJA Get Codified
Two adjustments to tax rules that were established by the TCJA of 2018 were officially made permanent in the “big, beautiful” bill.
- Miscellaneous itemized deductions: The 2% miscellaneous itemized deduction, temporarily disallowed by the 2018 tax law, is now fixed.
- Mortgage interest deduction: The TCJA’s $750,000 cap on deductible mortgage interest on home acquisition debt is also now permanent. (Somewhat related, the moving expense deduction has been permanently done away with as well, except for some members of the intelligence community.)
Additional Tax Deductions for Business Owners for Losses Related to Small Business Operations
Additionally, there were some changes to IRC (internal revenue code) section 165. Here is a comparison chart detailing the differences between “casualty loss deductions” and “wagering loss deductions” along with the changes to take effect in tax year 2026.
| Feature | Casualty Losses | Wagering Losses |
|---|---|---|
| Cause | Natural disasters, theft, accidents | Gambling or betting activities |
| Deduction Limit | Only if tied to federally declared disaster* | Only up to gambling winnings** |
| AGI Threshold | Yes (10% of AGI) | No AGI threshold, but capped by winnings |
| Physical Damage Required | Yes | No |
| Timeframe | Deductible in year of loss/discovery | Deductible in year of gambling activity |
*Beginning next year, damage from disasters declared at the state level will be allowable for deduction in addition to those declared at the federal level.
**Also effective in 2026, only 90% of losses will be deductible.
Tax Breaks: Pease Limitation Replaced with Smaller Reduction
The Pease limitation on itemized deductions for high earners was repealed, starting in 2026, the tax code regarding this deduction on your tax return will be replaced by a smaller reduction. Consulting an income tax advice professional or tax preparer is recommended to understand how these changes affect your specific situation and tax rate related to the business and deductions your small business can declare.
For help with investment strategy and retirement planning, learn how a fed-expert advisor can help you reach your financial goals.
General Tax Deduction Information for Federal Employees who Run Small Businesses on the Side
Tax deductions for small business owners help lower tax liability and increase tax savings when it comes to business assets and business income. Understanding what qualifies as tax deductible items for small business is important for effective tax form preparation.
Read this article about which federal retirees will still owe taxes on Social Security benefits.
Types of Itemized Tax Write-Offs for Business Owners
- Business Expenses: Any cost incurred for running your business can be considered a business expense and may be deductible.
- Business Travel: Expenses related to business trips, including transportation and lodging, are typically deductible.
- Business Meals: You may be able to deduct 100% of business meals when they are directly related to your business purpose.
- Business Insurance: Premiums paid for business insurance are generally fully deductible.
- Business Property: The cost of business property can be deducted, often through depreciation deductions.
- Self-Employment Tax: Business owners may qualify for deductions on self-employment tax.
- Home Office Deduction: If you run your business out of your home, you may be able to deduct related expenses.
- Business Vehicle: Expenses for vehicles used for business purposes can be deducted as a business expense.
- Tax Credits: Depending on your business structure, certain tax credits (such as the work opportunity tax credit) may also be available to lower your tax bill.
IRS Guidelines and Tax Preparation Tips to Lower Your Tax Liability
The IRS allows business owners to itemize deductions on their tax return, enabling you to take advantage of various tax deductions for small business. It’s advisable to consult a tax professional to ensure you are maximizing your deductions and complying with tax law. During tax season, keep thorough records of all business-related expenses. This will make it easier to document your deductions and complete your business tax return accurately. Using a worksheet can help you itemize your deductible expenses effectively. Many small business owners can benefit from understanding and utilizing tax deductions available to them. By knowing what items are tax deductible and keeping accurate records, you can effectively reduce your tax liability and make the most of your business expenses.
Subscribe to our newsletter and receive free federal retirement guidebook (PDF)!
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Federal Employee Benefits Consultants (ChFEBC℠), and Accredited Investment Fiduciary (AIF) professionals. At PlanWell, we are federal employee financial advisors with a focus on retirement planning. Learn more about our process designed for the career fed.
Preparing for federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.
