Most costs of running a business are tax deductible if they meet a two-part test set by Section 162 of the Internal Revenue Code: the expense has to be ordinary (common in your line of work) and necessary (helpful for your business).1Office of the Law Revision Counsel. 26 USC 162 Trade or Business Expenses That covers rent, utilities, supplies, marketing, professional fees, business travel, a portion of vehicle costs, part of a home used as an office, and depreciation on equipment. It also reaches self-employment costs like health insurance premiums and retirement plan contributions, and pass-through owners can deduct up to 20 percent of their qualified business income on top of everything else. Deductions reduce your taxable income, not your tax bill dollar-for-dollar, but they are the main lever most small business owners have for lowering what they owe.
The Ordinary and Necessary Test
Every deduction begins with the same question: is this expense ordinary and necessary for your trade or business? Ordinary means common and accepted in your field. A rideshare driver deducting a phone mount is ordinary; a software developer deducting a horse trailer probably is not. Necessary does not mean you would fail without it. It just needs to be helpful and appropriate for the work you do.
The expense also has to be tied to a profit-seeking activity rather than personal use. A freelance photographer buying a camera for client shoots can deduct it; the same camera bought for vacation snapshots cannot be deducted. When something serves both purposes, only the business share counts, and the IRS expects you to document the split. This line between business and personal spending is where most audit disputes start.
Everyday Operating Costs
Day-to-day costs that keep the business running are generally deductible in full in the year you pay them. That includes rent for office or retail space, utility bills, internet, phone plans used for business, and supplies like paper and printer ink. Marketing sits here too: website hosting, online advertising, printing business cards, and trade show booth fees. Business insurance premiums for general liability, professional liability, and commercial property coverage qualify as ordinary operating costs.
Professional development counts if the training maintains or improves skills you already use in the business. A self-employed accountant taking a continuing education course on new tax rules can deduct the tuition. The same accountant enrolling in law school cannot, because that qualifies them for a new profession.2Internal Revenue Service. Topic No. 513, Work-Related Education Expenses
Gifts to clients or business contacts are deductible up to $25 per recipient per year. Incidental costs like wrapping and shipping do not count toward that cap, but the gift itself is hard-capped. If you and your spouse both give a gift to the same person, you are treated as one taxpayer for the $25 limit.3Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
Startup and Organizational Costs
Money spent before the business officially opens gets its own treatment. You can deduct up to $5,000 of startup costs (market research, pre-launch advertising, scouting travel) in the year the business begins operating. That $5,000 shrinks dollar-for-dollar once total startup spending exceeds $50,000, so a business with $53,000 in startup costs deducts only $2,000 in year one. Whatever is left after the first-year deduction is spread evenly over the next 180 months.4Office of the Law Revision Counsel. 26 USC 195 Start-Up Expenditures
A separate $5,000 allowance with the same $50,000 phase-out applies to organizational costs for forming an LLC, corporation, or partnership, covering state filing fees and things like drafting an operating agreement. One timing rule matters: the business has to actually open. Spend $30,000 investigating a venture and walk away, and those costs are not deductible as startup expenses.
Equipment and Other Capital Purchases
Not everything gets deducted in the year of purchase. When you buy an asset that will last more than a year, such as equipment, vehicles, or furniture, the cost is a capital expense. Normally you recover it through depreciation, deducting a portion each year over the asset’s useful life under the Modified Accelerated Cost Recovery System. Office furniture depreciates over seven years; computers and most machinery over five.5Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
Two provisions let you skip the slow schedule and write off the full cost in year one.
Section 179 expensing lets you elect to deduct up to $2,560,000 of qualifying equipment, software, and certain real property in the year you place it in service. The allowance phases out dollar-for-dollar once total qualifying purchases exceed $4,090,000. The deduction cannot exceed your business’s taxable income for the year, though any unused amount carries forward.6Office of the Law Revision Counsel. 26 USC 179 Election to Expense Certain Depreciable Business Assets
Bonus depreciation was restored to 100 percent by the One, Big, Beautiful Bill for qualifying property acquired after January 19, 2025. It applies automatically unless you elect out, and unlike Section 179 it is not capped by your taxable income, so it can create or increase a net operating loss.7Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
For smaller purchases, the de minimis safe harbor lets you expense tangible property costing $2,500 or less per item (or $5,000 if you have audited financial statements) without capitalizing it. You make this election on your return each year.8Internal Revenue Service. Tangible Property Final Regulations
Getting the classification right matters. Deducting a $40,000 piece of equipment as a current expense when it should have been depreciated, or forgetting to elect Section 179 on the return, can trigger accuracy-related penalties.
Home Office
If you use part of your home exclusively and regularly as your principal place of business, you can deduct a share of your housing costs. Exclusively is the word the IRS focuses on: the space cannot double as a guest room, playroom, or personal workspace. A desk in the corner of a bedroom you sleep in does not qualify. A converted spare room used only for client calls and invoicing does.9Internal Revenue Service. How Small Business Owners Can Deduct Their Home Office From Their Taxes
There are two calculation methods. The simplified method deducts $5 per square foot of office space up to 300 square feet, capped at $1,500, with no tracking of individual housing bills. The actual expense method takes the percentage of your home used for business (usually by square footage) and applies it to mortgage interest or rent, property taxes, insurance, utilities, and repairs. It takes more recordkeeping but often produces a larger deduction, especially when the office occupies a meaningful share of the home.
This deduction is available to sole proprietors and independent contractors who file Schedule C. Employees working remotely cannot claim it on their federal return, even with a dedicated home office.
Vehicle Use
Business driving is deductible; a daily commute from home to a regular workplace is not. Business driving includes trips to meet clients, pick up supplies, travel between job sites, or go to a temporary work location. You pick one of two methods each year.
The standard mileage rate for 2026 is 72.5 cents per mile driven for business. Multiply your documented business miles by the rate and deduct the result. To use this method on a vehicle you own, you have to elect it in the first year the car is available for business use.10Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile, Up 2.5 Cents
The actual expense method tracks every vehicle cost: gas, oil changes, tires, insurance, registration, and depreciation or lease payments. Multiply the total by your business-use percentage. This often wins when you drive an expensive vehicle or have high repair costs but do not put on huge mileage.
Either way, you need a log showing the date, destination, miles, and business purpose of each trip. The IRS wants contemporaneous records, meaning entries made at or near the time of the trip rather than reconstructed at year-end. A spreadsheet or mileage app works.
Weight-Based Vehicle Caps
If you buy a vehicle and apply Section 179 or bonus depreciation, special caps apply based on weight. Heavy SUVs rated between 6,001 and 14,000 pounds gross vehicle weight have a Section 179 cap of roughly $32,000 in the first year, with the balance depreciated normally. Passenger cars rated at 6,000 pounds or less face separate annual ceilings that limit first-year write-offs even with bonus depreciation. Work trucks and vans over 6,000 pounds that are not designed primarily for passengers can qualify for the full Section 179 deduction without the SUV cap.6Office of the Law Revision Counsel. 26 USC 179 Election to Expense Certain Depreciable Business Assets
Travel and Meals
When a trip takes you away from your tax home (the city or metro area where your business is located) long enough that you need to sleep or rest, you can deduct airfare, train tickets, rental cars, rideshares, lodging, and incidentals like baggage fees and hotel tips.11Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses – Section: Travel
Business meals are 50 percent deductible. The meal has to have a clear business connection, such as discussing a project with a client or negotiating with a vendor. You or an employee must be present, and the meal cannot be lavish. Keep the receipt and note who attended, the business relationship, and what was discussed.12Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses – Section: Meals
Rather than saving every meal receipt while traveling, you can use the federal per diem rate for meals and incidental expenses. The General Services Administration publishes rates by city. You still need to document the dates, destination, and business purpose. Lodging has to be substantiated with actual receipts even when using per diem for meals.
Self-Employment Deductions
Sole proprietors and other self-employed people pay both the employer and employee sides of Social Security and Medicare, totaling 15.3 percent of net earnings. You can deduct the employer-equivalent half (7.65 percent) when calculating your adjusted gross income. This reduces income tax, not the self-employment tax itself.13Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Health Insurance
Self-employed people with a net profit who are not eligible for a subsidized plan through a spouse’s employer can deduct 100 percent of premiums paid for medical, dental, vision, and qualifying long-term care insurance covering themselves, a spouse, dependents, and children under age 27. The plan has to be established under the business, though it can be in your personal name. The deduction is taken on your personal return as an adjustment to income, not on Schedule C.14Internal Revenue Service. Instructions for Form 7206
Retirement Contributions
Contributions to a retirement plan for yourself are one of the largest deductions available to a self-employed owner. A SEP-IRA allows contributions of up to 25 percent of net self-employment earnings, with a 2026 maximum of $72,000.15Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) A solo 401(k) lets you make an employee elective deferral of up to $24,500 ($31,000 if you are 50 or older), plus employer profit-sharing contributions of up to 25 percent of compensation, with a combined ceiling of $72,000.16Internal Revenue Service. Notice 25-67, 2026 Amounts Relating to Retirement Plans and IRAs Contributions reduce taxable income the year you make them, and the money grows tax-deferred until retirement.
Qualified Business Income Deduction
Pass-through owners (sole proprietors, S corporation shareholders, partners) can deduct up to 20 percent of their qualified business income under Section 199A. This deduction was set to expire after December 31, 2025, but the One, Big, Beautiful Bill made it permanent starting with the 2026 tax year.17Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
Below certain taxable income thresholds, the math is simple: 20 percent of qualified business income. Above those thresholds, the calculation gets more complex and may be limited based on W-2 wages you pay, the type of business, and the cost of depreciable property the business holds. Specified service businesses like law, accounting, and consulting face steeper phase-outs at higher income levels.18Internal Revenue Service. Qualified Business Income Deduction
Professional Fees, Interest, Payroll Taxes, and Bad Debts
Fees paid to accountants, attorneys, bookkeepers, and other professionals for work directly related to the business are deductible. Tax preparation for the business portion of your return, legal fees for contracts or business disputes, and consultant fees for operational work all qualify. The same logic reaches payroll processing, IT support, and outsourced HR.
Interest on money borrowed for business purposes is deductible, whether it is a bank loan, a business credit card balance, or a line of credit used for inventory. The borrowed funds have to have actually been used for the business. If you take a personal loan and use only part of it for business, only the interest on the business portion is deductible.
Employers can deduct the taxes they pay on behalf of employees, including the employer share of Social Security (6.2 percent) and Medicare (1.45 percent), which together total 7.65 percent of each employee’s wages.19Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates State unemployment tax and the employer’s share of federal unemployment tax are deductible too, along with personal property taxes on business equipment and vehicles.
Bad Debts
When a customer owes money and it becomes clear they will not pay, you can deduct the loss as a business bad debt. You need to show the debt was created in the course of business, that you have taken reasonable steps to collect, and that there is no realistic expectation of payment. A lawsuit is not required, but you do need to show that pursuing a judgment would be pointless. Cash-method taxpayers generally cannot deduct unpaid invoices for services because the income was never reported. Accrual-method businesses, which record income when earned rather than when received, are the ones who typically claim this deduction.20Internal Revenue Service. Topic No. 453, Bad Debt Deduction
Records and Penalties
The IRS does not require a particular system, but it does require records to be adequate. That means receipts, bank statements, mileage logs, and written notes of the business purpose behind each expense. Digital records are fine. For travel and vehicle expenses, the IRS expects documentation at or near the time the expense occurs, including the amount, date, place, and business purpose.3Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
Keep those records at least three years from the date you file, because the IRS generally has three years to audit. That window extends to six years if you understate gross income by more than 25 percent, and there is no time limit if you file a fraudulent return or fail to file at all.21Internal Revenue Service. Statutes of Limitations for Assessing, Collecting and Refunding Tax
If the IRS finds you claimed deductions negligently or disregarded the rules, the accuracy-related penalty is 20 percent of the underpaid tax.22Office of the Law Revision Counsel. 26 USC 6662 Imposition of Accuracy-Related Penalty on Underpayments Negligence includes failing to keep adequate records, claiming deductions you cannot substantiate, and misclassifying personal costs as business expenses. The penalty stacks on top of the tax owed and interest, so weak records can turn expensive quickly.