As a sole proprietor, you can write off any ordinary and necessary expense of running your business, and those write-offs cut both your income tax and your self-employment tax. Writing off business expenses as a sole proprietor happens on Schedule C, which attaches to your personal Form 1040 and treats your business profit as your personal income. Every legitimate deduction shrinks that profit, and because the same number drives two different taxes, each dollar you deduct tends to save you noticeably more than a dollar deducted from a regular paycheck would.
What Counts as a Deductible Expense
Federal law lets you deduct all “ordinary and necessary” expenses of carrying on a business.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses Ordinary means the expense is common and accepted in your line of work. Necessary means it’s helpful and appropriate for the business. The expense doesn’t have to be indispensable; it just has to serve a real business purpose rather than a personal one.
The line between business and personal is strict. Flying to meet a client is deductible. Driving from your house to the same office every morning is personal commuting and isn’t. When an expense has both business and personal uses, you deduct only the business portion. A cell phone split evenly between work and personal calls is 50% deductible.
The Deductions Most Sole Proprietors Actually Use
Day-to-day operating costs are the easiest category. Supplies consumed in your normal work — paper, cleaning products, raw materials — come straight off your revenue. Advertising and marketing qualify as long as they’re aimed at attracting or keeping customers, whether that’s online ads, business cards, or a website. Fees paid to accountants, attorneys, or other professionals for business work are deductible in the year you pay them.
Insurance premiums that protect the business are generally deductible, including liability coverage, malpractice insurance, and property insurance on business assets. Rent, utilities, and dedicated internet or phone service for a business location outside your home qualify as well. Business travel — airfare, lodging, and ground transportation — is deductible when you travel overnight away from your tax home for business reasons, as long as the costs aren’t extravagant.
Health Insurance Is a Special Case
Health insurance premiums get different treatment from other business expenses. Instead of appearing on Schedule C, they go on your personal return as an adjustment to income using Form 7206. The practical effect is the same lower taxable income, but the deduction can’t exceed your net profit from the business. There’s also a trap: you can’t claim the deduction for any month you were eligible to participate in a subsidized health plan through your spouse’s employer, even if you declined to enroll.2Internal Revenue Service. Instructions for Form 7206 The IRS applies this rule month by month, so if your spouse started a job with benefits in July, you’d lose the deduction only for July through December.
The Home Office Deduction
If you use part of your home regularly and exclusively for business, and it serves as your principal place of business or a place where you meet clients, you can deduct a portion of your housing costs. The “exclusively” requirement is where most claims collapse. A dining table that doubles as your workspace doesn’t count.
Two calculation methods are available. The simplified option gives you $5 per square foot of dedicated business space, capped at 300 square feet, for a maximum deduction of $1,500 per year.3Internal Revenue Service. Simplified Option for Home Office Deduction You skip the paperwork but forfeit any depreciation deduction on the home.
The actual expense method takes more work but usually produces a bigger deduction. You calculate the business percentage of your home based on square footage, then apply that percentage to mortgage interest, property taxes, utilities, homeowner’s insurance, and repair costs. If your office occupies 15% of the house, you deduct 15% of those expenses. This method also requires a depreciation calculation for the business portion of the home.
Vehicle Expenses
If you drive for business, you choose between two methods. Once you start using the actual expense method for a particular vehicle, you generally can’t switch back to the standard mileage rate for that same vehicle.
The standard mileage rate for 2026 is 72.5 cents per mile.4Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile You multiply that rate by every business mile driven during the year. The only record you need is a mileage log showing the date, destination, business purpose, and miles for each trip.
The actual expense method lets you deduct the business percentage of all vehicle operating costs: gas, oil changes, repairs, tires, insurance, registration, and depreciation or lease payments. If 60% of your total miles for the year were for business, you deduct 60% of those costs. You need to track both total miles and business miles plus receipts for every expense. Actual expenses tend to produce a bigger deduction for pricey vehicles with high operating costs, while the standard mileage rate often wins for cheaper, fuel-efficient cars.
Business Meals
Meals with a business purpose are 50% deductible.5Internal Revenue Service. Income and Expenses 2 If you spend $80 on lunch with a potential client, you write off $40. The meal can’t be lavish, and you or an employee must be present. The 50% cap applies whether the meal happens locally or on a business trip.
Documentation matters here more than almost anywhere else. For every deductible meal, record the date, the amount, who you ate with, your business relationship, and what you discussed. Vague notes like “business lunch” won’t survive an audit. The IRS wants evidence that a genuine business conversation happened during or directly before or after the meal.
Equipment, Depreciation, and Section 179
When you buy equipment, furniture, a computer, or any asset that will last more than a year, you generally can’t deduct the full cost right away. You spread it over the asset’s useful life through depreciation, typically using the Modified Accelerated Cost Recovery System (MACRS) and reporting it on Form 4562.6Internal Revenue Service. About Form 4562, Depreciation and Amortization A five-year asset like a computer has its cost spread across five tax years under the MACRS schedules.
Two provisions let you accelerate that deduction. Section 179 allows you to immediately expense the full cost of qualifying assets in the year you place them in service. For 2025, the maximum Section 179 deduction is $2,500,000, with a phase-out starting at $4,000,000 in total equipment purchases.7Internal Revenue Service. Instructions for Form 4562 These limits adjust for inflation, and the 2026 figures are expected to be modestly higher. Section 179 is the practical workhorse for sole proprietors buying vehicles, machinery, or office equipment.
Bonus depreciation is a separate provision that also allows immediate expensing but has been phasing down. For assets placed in service during 2026, bonus depreciation covers only 20% of the cost; the rest is depreciated normally under MACRS. For most sole proprietors, Section 179 is the better tool because it still provides full first-year expensing within its limits.
Costs You Paid Before Opening
If you launched recently, the money you spent before opening day gets different treatment than ongoing expenses. Market research, advertising for the launch, employee training, and travel to scope out suppliers all count as startup costs. You can immediately deduct up to $5,000 of those costs in your first year, but the $5,000 allowance shrinks dollar for dollar once total startup costs exceed $50,000 and disappears at $55,000.8eCFR. 26 CFR 1.195-1 – Election to Amortize Start-Up Expenditures Anything you can’t deduct immediately gets spread over 180 months, starting with the month you open.
Organizational costs — legal fees for setting up the business, state filing fees, and launch-related accounting work — follow the same rules, with their own $5,000 immediate deduction and the same $50,000 phase-out.8eCFR. 26 CFR 1.195-1 – Election to Amortize Start-Up Expenditures The two categories are tracked separately, so you could deduct up to $10,000 total in year one if each category stays under $50,000.
The Extra 20% From Qualified Business Income
On top of your Schedule C deductions, sole proprietors may qualify for an additional 20% deduction on qualified business income under Section 199A.9Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income It doesn’t appear on Schedule C. You take it on your personal return, and it reduces your taxable income though not your self-employment tax. If Schedule C shows $100,000 in net profit, the QBI deduction could shelter up to $20,000 from income tax.
The math stays simple as long as your total taxable income stays below roughly $200,000 (single) or $400,000 (married filing jointly) for 2026. Above those thresholds, the deduction phases out for certain service businesses like law, accounting, health care, and consulting. Below them, you generally get the full 20% regardless of industry. The deduction is available whether you take the standard deduction or itemize, and 2025 legislation made it permanent.
Why a Schedule C Deduction Is Worth More Than It Looks
Schedule C deductions do double duty. They reduce your income tax and your self-employment tax, which funds Social Security and Medicare. The self-employment tax rate is 15.3% — 12.4% for Social Security and 2.9% for Medicare — and it applies to 92.35% of your net profit.10Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)11Internal Revenue Service. Understanding Taxes – Module 14 Self-Employment Income and Self-Employment Tax
Here’s what that means in practice. A sole proprietor earning $80,000 in net profit who finds another $5,000 in legitimate deductions saves income tax on that $5,000 plus roughly $707 in self-employment tax (15.3% × 92.35% × $5,000). Combined, the savings often total 30% or more of the deduction for someone in the 22% income tax bracket. That’s why hunting down every ordinary and necessary expense pays off more than most other financial moves a self-employed person can make in a year.
Records That Hold Up
The burden of proving every deduction falls on you. The IRS can disallow any expense you can’t substantiate with records showing the amount, date, business purpose, and — for meals — who was involved and what you discussed. Receipts, invoices, bank statements, and credit card records all serve as evidence.
Vehicle and travel deductions require a contemporaneous log. For mileage, that means recording the odometer at the start and end of the year plus the date, destination, business purpose, and miles for each trip. Reconstructing a mileage log after the fact is one of the fastest ways to lose a deduction in an audit.
Keeping business finances separate from personal finances is the single most effective record-keeping move you can make. A dedicated business bank account and credit card create a clean audit trail and make it obvious which expenses were business-related. Commingling funds makes bookkeeping harder and gives auditors a reason to scrutinize every transaction.
Keep your records for at least three years from the date you filed or the return’s due date, whichever is later.12Internal Revenue Service. How Long Should I Keep Records If you underreported income by more than 25%, the IRS has six years to audit you. Records tied to property you’re depreciating should be kept until three years after you dispose of the asset, since the IRS may need to verify your cost basis.13Internal Revenue Service. Topic No. 305, Recordkeeping
Where It All Lands on the Return
All business income and deductions flow through Schedule C (Profit or Loss From Business), which attaches to your Form 1040.14Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) Revenue goes at the top, expenses by category in the middle — advertising, insurance, office supplies, utilities, and so on. The bottom line is your net profit or loss, which flows to two places: your Form 1040 for income tax and Schedule SE for self-employment tax.
Some deductions need their own supporting forms before the number reaches Schedule C. The home office actual expense method uses Form 8829 (the simplified method goes on a dedicated line of Schedule C). Vehicle expenses using the actual method require Part IV of Schedule C for auto information. Depreciation and Section 179 run through Form 4562. The forms link together, so by the time net profit appears on Schedule C it already reflects every deduction claimed across the supporting schedules.