Your business can pay for any cost that is ordinary and necessary for your trade, and it can pay the business-use share of mixed costs like a home office, a personal vehicle, or a cell phone — but the personal expenses my business can pay for stop at that line. Groceries, your family’s clothing, your commute, the mortgage on the rooms you don’t work in: those stay personal, no matter whose account writes the check. Run them through the business and you invite back taxes, penalties, and, for LLCs and corporations, the loss of the liability shield you formed the entity to get.
The Test That Decides Every Deduction
Federal tax law lets a business deduct expenses that are ordinary — common and accepted in your line of work — and necessary, meaning helpful and appropriate for running it.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses An accountant buying tax software clears both prongs. A landscaper buying the same software probably doesn’t, because it isn’t common in that trade.
Anything that fails the test is a personal, living, or family expense, and federal law makes those nondeductible.2Office of the Law Revision Counsel. 26 USC 262 – Personal, Living, and Family Expenses Paying your gym membership, your child’s tuition, or a weekend dinner tab from the business account doesn’t turn those bills into deductions. It just creates an audit problem.
A third category matters most in practice: costs that serve both purposes. Phones, vehicles, home internet. You split the cost by the share of genuine business use, and only that share qualifies.3Internal Revenue Service. Income and Expenses Almost everything below is a rule for splitting.
Home Office and a Share of Household Bills
If part of your home is used exclusively and regularly for work, the business can pay a proportional slice of your household costs. The space has to be your principal place of business or a spot where you actually meet clients or customers. A desk in the living room that doubles as your kids’ homework station won’t qualify, because it isn’t used only for business.4Internal Revenue Service. Publication 587 (2024), Business Use of Your Home
Once you clear that bar, the business share can cover rent or mortgage interest, property taxes, utilities, homeowners insurance, and internet. The usual allocation is office square footage divided by total home square footage. An office of 200 square feet in a 2,000-square-foot house means 10 percent of those bills.5Internal Revenue Service. Topic No. 509, Business Use of Home
The IRS also offers a simplified method: $5 per square foot of office space, up to 300 square feet, capped at $1,500 a year. Smaller deduction, no allocations to track.6Internal Revenue Service. Simplified Option for Home Office Deduction
Two narrow exceptions skip the exclusive-use requirement: storing inventory or product samples at home, and running a licensed daycare from your residence.4Internal Revenue Service. Publication 587 (2024), Business Use of Your Home
Your Personal Vehicle
The business can cover driving you do for work — client visits, supply runs, travel between job sites. You pick one of two methods each year.
The standard mileage rate for 2026 is 72.5 cents per mile, and it bundles gas, depreciation, insurance, maintenance, and repairs into a single rate.7Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile The actual expense method has the business pay the business-use share of every real cost: gas, oil changes, tires, repairs, registration, insurance. If 60 percent of your driving is business, the business covers 60 percent of each bill. More paperwork, sometimes a bigger deduction, especially with expensive vehicles or heavy repairs.
Either method needs a contemporaneous log — a mileage app or a notebook — recording each trip’s date, destination, business purpose, and miles. Without it, the IRS can disallow the whole vehicle deduction.
One thing the business can never pay: your commute between home and a regular workplace. That’s personal, no matter the distance.8Internal Revenue Service. Revenue Ruling 99-7 – Commuting and Transportation Expenses
Health Insurance for the Self-Employed
If you are self-employed — sole proprietor, partner, or a shareholder owning more than 2 percent of an S corporation — the business can pay 100 percent of health, dental, vision, and qualified long-term care premiums for you, your spouse, your dependents, and your children under 27.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses The deduction goes on your personal return, not the business’s Schedule C, and it reduces adjusted gross income.
Two limits: the deduction can’t exceed your net self-employment income from the business that set up the plan, and you can’t claim it for any month you were eligible for subsidized coverage through your own employer, your spouse’s employer, or an employer of a dependent.9Internal Revenue Service. Instructions for Form 7206
Retirement Contributions
Funding retirement through the business is one of the most efficient things it can spend money on for you. Contributions come off business income and the money grows tax-deferred.
A SEP IRA lets the business contribute up to 25 percent of compensation, with a 2026 cap of $69,000, and you can dial the amount up or down year to year.10Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
A Solo 401(k) is available to self-employed people with no employees other than a spouse. You can defer up to $24,500 in 2026 as the employee side, then add employer contributions of up to 25 percent of net self-employment income. Workers 50 and older get an $8,000 catch-up; those 60 through 63 get $11,250 instead.11Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
Travel and Meals
The business can pay for travel that takes you far enough from your tax home that you need to sleep or rest before returning. That covers airfare, hotels, rental cars, and incidentals like tips and dry cleaning.12Internal Revenue Service. Publication 463 (2024), Travel, Gift, and Car Expenses If a trip mixes business and personal time, only the business-day costs qualify. Tacking a vacation onto the back of a conference doesn’t convert the resort bill.
Business meals are deductible at 50 percent, provided you or an employee is present and the meal isn’t lavish.13Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Amusement, Recreation, and Travel Expenses The temporary 100 percent restaurant deduction from 2021 and 2022 has expired.14Internal Revenue Service. Here’s What Businesses Need to Know About the Enhanced Business Meal Deduction For each meal, record the date, location, amount, who attended, and the business topic.
Education Tied to Your Current Work
The business can pay for education that maintains or improves skills you already use, or that a law or regulation requires you to keep your license. Tuition, textbooks, lab fees, and transportation to class all qualify.15GovInfo. 26 CFR 1.162-5 – Expenses for Education
The line is between improving at what you do and training for something different. A practicing CPA taking an advanced tax course is sharpening a current skill — deductible. The same CPA enrolling in medical school is preparing for a new profession, and that’s not deductible even if some coursework overlaps. Seminars, workshops, and industry conferences qualify as long as they connect to your current trade.
Phones, Technology, Insurance, and Startup Costs
A cell phone the business provides primarily for work — client contact, coordinating with staff, running operations on the road — is deductible, and the IRS doesn’t require you to log every personal call as long as the primary reason for the phone is business.16Internal Revenue Service. IRS Issues Guidance on Tax Treatment of Cell Phones Use a single phone for everything, and a reasonable allocation based on use is expected.
Computers, software subscriptions, and printers follow the same ordinary-and-necessary rule. A laptop your kids also use for school gets split; only the business share is deductible.
Business insurance — general liability, professional liability, property coverage — is deductible as an ordinary cost of operation. Your personal auto or homeowners policy is not, except through the vehicle and home office allocations above.
A new business can also deduct up to $5,000 in startup costs in its first year. The $5,000 phases out dollar for dollar once total startup spending exceeds $50,000, and any remaining startup costs are spread over 180 months.17Office of the Law Revision Counsel. 26 USC 195 – Start-up Expenditures
What Happens If the Business Pays Truly Personal Bills
Using the business account for personal expenses is not just a bookkeeping problem. The consequences reach further than the original expense.
Constructive Dividends and Extra Tax
When a C corporation pays an owner’s personal bills, the IRS reclassifies the payment as a dividend to the shareholder. The owner owes income tax on it, the corporation loses whatever deduction it tried to claim, and the payment can also pull in the 3.8 percent net investment income tax.18Internal Revenue Service. Application of Section 1411 to Dividend Income For S corporation and partnership owners, personal expenses run through the business are usually treated as taxable distributions or guaranteed payments, with similar results.
Losing the Liability Shield
A major reason people form an LLC or corporation is to keep personal assets separate from business debts. Courts can strip that protection through a doctrine called piercing the corporate veil, which applies when an owner has treated the business as an extension of personal finances. Paying personal bills from the business account is one of the biggest factors courts weigh, because it suggests the business has no genuine separate existence. If the veil is pierced, creditors can go after your personal assets.
Penalties
Claiming personal expenses as business deductions can bring an accuracy-related penalty of 20 percent of the underpaid tax if the IRS finds the error came from negligence or a substantial understatement.19Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments If the IRS finds the mischaracterization was intentional, the civil fraud penalty is 75 percent of the underpayment attributable to fraud.20Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
Records You Need to Keep
Documentation is the only defense if the IRS questions a deduction. For each expense, keep five things: amount, date, place or vendor, business purpose, and (for meals) who was there.21Internal Revenue Service. What Kind of Records Should I Keep Receipts, invoices, canceled checks, credit card statements, and bank records all work. Digital copies are fine as long as the system produces legible copies on demand and has reasonable safeguards against unauthorized changes.22Internal Revenue Service. Revenue Procedure 97-22 – Electronic Storage System Requirements
The standard retention period is three years from the return. Six years if you fail to report more than 25 percent of your gross income. Seven years if you claim a deduction for worthless securities or bad debts. Indefinitely if you file a fraudulent return or don’t file at all. Employment tax records: at least four years after the tax is due or paid. Records for property and equipment the business owns: at least three years after you sell or dispose of the asset.23Internal Revenue Service. How Long Should I Keep Records