What Items Can You Deduct as a Business Expense?

Business expense deductions cover the ordinary and necessary costs of running your operation, from payroll and rent to vehicle mileage, a home office, equipment purchases, retirement plan contributions, and most types of business insurance. The categories are broad, but each one carries its own rules, limits, and record-keeping demands. Getting the deduction right means knowing which costs qualify, how much of each one you can write off, and what paperwork you need if the IRS asks.

What Qualifies as a Deductible Business Expense

An expense is deductible when it is both ordinary and necessary. Ordinary means common and accepted in your line of work. Necessary means helpful and appropriate for the business, though not strictly indispensable.¹ Employee compensation carries an added test: the amount must be reasonable for the services performed. Pay that far exceeds market rates for similar work can be partially disallowed.

The documentation burden sits on you. The IRS can throw out any deduction you cannot support with records showing the amount, the date, and the business purpose. Keep receipts, invoices, bank and card statements, and a short note tying each expense to the business. Travel and vehicle costs have stricter rules, covered below. Weak records do more than cost you the deduction; they open the door to penalties and interest on the resulting underpayment.

Everyday Operating Costs

Most of the money that keeps a business running is deductible in full in the year you spend it.

Salaries, wages, bonuses, and commissions paid to employees, along with the employer’s share of Social Security, Medicare, and unemployment taxes.¹
Rent for office, warehouse, or retail space, plus utilities like electricity, internet, phone, and water.
Office supplies, postage, packaging, and software subscriptions.
Professional fees paid to accountants, lawyers, consultants, and bookkeepers for work tied to the business.
Advertising and marketing, including digital ads, website hosting, business cards, print placements, and promotional materials.

Payments to independent contractors are deductible just like wages, but the reporting rules differ. For 2026, you must file Form 1099-NEC for any contractor you pay $2,000 or more during the tax year, up from the prior $600 threshold.² Skipping the 1099-NEC does not kill the deduction, but it brings its own penalties and creates a reporting mismatch that attracts attention.

Travel, Meals, and Entertainment

This is where the IRS looks hardest, because the line between business spending and personal enjoyment moves around.

Business Travel

Travel costs are deductible when you are away from your tax home long enough that you need to stop for sleep or rest. Your tax home is the city or general area of your primary place of business, which may or may not be where you live.³ Deductible items include airfare, train tickets, rental cars, lodging, dry cleaning on the road, and related tips.

On mixed trips, only the business portion is deductible. Fly to a conference and add three vacation days, and the registration and the hotel nights tied to the conference qualify. The weekend at the beach does not. Whether the flight itself is deductible turns on whether the trip’s primary purpose was business.

Meals

Business meals are 50% deductible, including tax and tip, as long as the meal is not lavish and is directly tied to a business activity.³ You or an employee must be present, and a real business discussion or relationship must be involved.

A significant change took effect in 2026. Meals provided on business premises for the convenience of the employer, previously deductible, lost their deduction entirely under IRC §274(o). If you run an employee cafeteria or regularly feed staff on site, that cost no longer reduces taxable income. Occasional overtime meals that qualify as a de minimis fringe benefit under §132 may still be 50% deductible, but only if they are genuinely occasional and tied to overtime work.

Entertainment

Entertainment is not deductible at all. Tickets to sporting events, concerts, and golf outings produce no tax benefit. Food and drinks consumed at an entertainment event can still be 50% deductible, but only if they are invoiced or receipted separately from the entertainment charges.³

Vehicle Expenses

If you use a personal vehicle for business, you deduct the business-use share through one of two methods, chosen per vehicle.

The standard mileage rate for 2026 is 72.5 cents per business mile.⁴ That single rate covers gas, oil, repairs, insurance, registration, and depreciation. You must choose this method in the first year the vehicle is available for business use. You cannot switch to standard mileage after claiming actual expenses and depreciation on the same vehicle in a prior year.

The actual expense method asks you to track every operating cost (fuel, maintenance, tires, insurance, registration, lease payments, and depreciation) and deduct the business-use percentage. Drive 70% for business, and 70% of those costs come off.

Either method requires a mileage log with the date, destination, business purpose, and miles for each trip. This is the record people most often skip, and it is the first thing the IRS asks for in an audit. A phone app that tracks trips automatically is far more reliable than reconstructing a year’s driving from memory.

Home Office

If part of your home is used exclusively and regularly as your principal place of business, or as a space where you meet clients, you can deduct a portion of your housing costs.⁵ “Exclusively” is the word that disqualifies most would-be deductions. A guest room that doubles as an office does not count unless the business area is a clearly defined, dedicated space.

The simplified method gives you $5 per square foot of dedicated office space, capped at 300 square feet, for a maximum deduction of $1,500 per year.⁵ No tracking of household expenses, no depreciation to calculate.

The actual expense method calculates the business-use percentage of the home, usually by square footage, and applies it to mortgage interest or rent, property taxes, utilities, homeowner’s insurance, and repairs. You also depreciate the business portion of the home itself. The deduction is usually larger, but the method takes more bookkeeping and triggers potential depreciation recapture when you sell.

Equipment, Property, and Depreciation

Assets with a useful life beyond one year generally cannot be deducted all at once as an ordinary expense. You capitalize the cost and recover it through depreciation. Two provisions let most small businesses write off the full cost of qualifying property in the purchase year anyway.

Section 179 Expensing

Section 179 lets you deduct the full purchase price of qualifying equipment and software in the year it is placed in service. For tax years beginning in 2026, the maximum deduction is inflation-adjusted upward from the statutory base of $2,500,000, and begins phasing out dollar-for-dollar once total qualifying property placed in service exceeds $4,000,000.⁶ The inflation-adjusted 2026 figures are approximately $2,560,000 and $4,090,000. One important restriction: the Section 179 deduction cannot exceed your taxable business income for the year, so it cannot create or increase a net loss.

Bonus Depreciation

Bonus depreciation is an additional first-year deduction on qualifying property. Legislation signed in 2025 permanently restored the rate to 100% for qualifying property acquired and placed in service after January 19, 2025.⁷ It is calculated after any Section 179 deduction and before regular depreciation.⁸ Unlike Section 179, bonus depreciation can create a net operating loss.

Between Section 179 and 100% bonus depreciation, most small and mid-sized businesses can write off their entire equipment outlay in the year of purchase. Standard MACRS depreciation still applies to assets that do not qualify for either accelerated method, or when a business elects out.

Startup and Organizational Costs

Expenses incurred before the business opens are treated differently from ongoing operating costs. You can immediately deduct up to $5,000 in startup costs in the year the business begins. That $5,000 allowance is reduced dollar-for-dollar once total startup expenses exceed $50,000.⁹ Anything left over is amortized over 180 months, starting with the month the business opens.

Startup costs include market research, scouting locations, launch advertising, pre-opening training, and travel to line up suppliers or distributors. Organizational costs for forming an LLC or corporation (filing fees, legal drafting of operating agreements) get parallel treatment under a separate provision: the same $5,000 immediate deduction and 180-month amortization. Spend $53,000 getting a business off the ground, and your first-year deduction drops to $2,000, with the remaining $51,000 spread across 15 years.

Retirement Plan Contributions

Retirement plan contributions are one of the largest deductions available to small business owners, and they build long-term wealth at the same time. Several plans are designed for self-employed people and small employers, with 2026 limits as follows.

SEP IRA: employer contributions cannot exceed the lesser of 25% of the employee’s compensation or $72,000 for 2026. Setup and administration are minimal. Employees cannot make their own salary deferrals into a SEP.¹⁰
Solo 401(k): available to self-employed individuals with no employees other than a spouse. You contribute in two roles: as the employee (up to $24,500 in elective deferrals for 2026) and as the employer (up to 25% of compensation). The combined total cannot exceed $72,000, excluding catch-up contributions. Participants age 50 and older can add $8,000, and those aged 60 through 63 get a higher catch-up of $11,250.¹¹
SIMPLE IRA: designed for businesses with 100 or fewer employees. Employees can defer up to $17,000 for 2026, with a $4,000 catch-up for those 50 and older ($5,250 for ages 60–63). The employer must either match deferrals dollar-for-dollar up to 3% of compensation, or make a flat 2% nonelective contribution for all eligible employees.¹²¹³

Employer contributions and matching amounts are deductible as business expenses on the return where business income is reported. For sole proprietors, the deduction for your own contributions as the business owner lands on Schedule 1 of Form 1040, reducing adjusted gross income.

Taxes, Interest, and Insurance

Deductible Taxes

Taxes tied to running a business are deductible: the employer’s share of Social Security and Medicare, state and local income or franchise taxes on business profits, real estate taxes on business property, and personal property taxes on business equipment. Federal income tax is never deductible.¹⁴

Self-employed individuals pay both sides of Social Security and Medicare, totaling 15.3% of net self-employment income. You can deduct the employer-equivalent half when calculating adjusted gross income.¹⁵ The deduction does not shrink the self-employment tax itself; it lowers the income subject to regular income tax.

Business Interest

Interest on business debt is deductible, whether it is a term loan, line of credit, equipment financing, or business credit card. Businesses with average annual gross receipts of $31 million or less over the prior three years are generally exempt from the business interest limitation that applies to larger companies.¹⁶ For most small businesses, interest comes off without hitting a cap.

Insurance

Premiums for business insurance are fully deductible. Common types include general liability, commercial property, professional liability (malpractice or errors and omissions), business interruption, and workers’ compensation.

Health insurance gets special treatment for self-employed individuals. If you are not eligible for an employer-sponsored plan through a spouse’s job or another source, you can deduct 100% of the premiums you pay for medical, dental, and vision coverage for yourself, your spouse, and your dependents.¹⁷ The deduction is limited to the net self-employment income from the business under which the plan is established, and it is taken on your personal return rather than on Schedule C.

Education That Maintains Your Current Skills

Training and education expenses are deductible when they maintain or improve skills you already use in your current business. A freelance web developer taking an advanced JavaScript course, or a plumber attending a code-compliance seminar, can write off tuition, books, supplies, and related travel.¹⁸ Industry conferences, professional certifications, and continuing education required to keep a license all qualify.

Education that qualifies you for a new trade or business does not. If a marketing consultant enrolls in law school, that tuition is not a deductible business expense, however useful a law degree might be. The dividing line is between sharpening what you already do and acquiring a new professional credential.

What You Cannot Deduct

A few categories catch filers off guard every year.

Personal expenses, even those that happen during business hours. Commuting from home to a regular workplace, personal clothing (unless it is a uniform not suitable for everyday wear), and personal meals all fail the test.
Government fines and penalties. Any amount paid to a government entity for violating a law is non-deductible, including traffic tickets, OSHA fines, environmental penalties, and tax penalties.¹⁹
Political contributions and lobbying. Donations to candidates, parties, or PACs are never deductible, and lobbying aimed at influencing legislation at any level of government is similarly barred.
Federal income tax, personal or corporate.¹⁴

The Hobby Loss Trap

If the IRS reclassifies your business as a hobby, every deduction disappears. The agency looks at whether you run the activity with genuine profit intent, examining factors like whether you keep proper books, adjust methods to improve profitability, and depend on the income.²⁰ A safe harbor helps: if the activity turns a profit in at least three out of five consecutive years, the IRS presumes it is a legitimate business. Falling short does not automatically make it a hobby, but it shifts the burden onto you to prove profit motive through other evidence.

1
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
2
Internal Revenue Service. 2026 Publication 1099 – General Instructions for Certain Information Returns
3
Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
4
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile, Up 2.5 Cents
5
Internal Revenue Service. Simplified Option for Home Office Deduction
6
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
7
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
8
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
9
Office of the Law Revision Counsel. 26 USC 195 – Start-Up Expenditures
10
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
11
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
12
Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
13
Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
14
Internal Revenue Service. Topic No. 503, Deductible Taxes
15
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
16
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
17
Internal Revenue Service. 2025 Instructions for Form 7206
18
Internal Revenue Service. Topic No. 513, Work-Related Education Expenses
19
Internal Revenue Service. Transitional Guidance Under Sections 162(f) and 6050X
20
Internal Revenue Service. Know the Difference Between a Hobby and a Business