What Business Expenses Can I Deduct? A Guide for Small Business Owners
Tax Strategy
What qualifies, what doesn't, the deductions owners most often miss, and how to make sure yours hold up.
Quick Answer
What business expenses can small business owners deduct?
Small business owners can generally deduct expenses that are both ordinary and necessary for their business, such as rent, supplies, software, advertising, insurance, business travel, and the business portion of vehicle, phone, and home office costs. Personal expenses, commuting, and entertainment generally aren't deductible. Every deduction needs a clear business purpose and records to back it up.
Deductions are one of the most powerful tools a small business owner has for lowering taxes, and one of the most misunderstood. Some owners leave legitimate deductions on the table because they aren't sure what qualifies. Others deduct things that won't hold up if the IRS asks questions.
This guide covers the rule that decides whether an expense is deductible, the most common business deductions, the ones owners often overlook, what isn't deductible, and how to keep records that support your return.
The Rule Behind Every Deduction
The starting point for nearly every business deduction is the same test: the expense must be ordinary and necessary for your business.
An ordinary expense is one that's common and accepted in your industry. A necessary expense is one that's helpful and appropriate for your business. It doesn't have to be indispensable. A landscaping company buying a trailer, a dental practice paying for continuing education, and a retail shop buying display fixtures all pass the test easily.
The test also has a limit built in. The expense has to be for the business, not for you personally. When something serves both purposes, like a phone or a vehicle, only the business portion is deductible.
"A deduction isn't free money. It reduces the income you're taxed on, so you save a percentage of what you spend, not the whole amount."
Common Business Deductions
Most small businesses will recognize the majority of these. The goal is to make sure each one is being tracked and categorized correctly.
Rent, utilities, and office costs
Rent for your office, shop, or storefront, along with utilities, repairs, and maintenance, is generally deductible. So are office supplies, postage, and small items your business uses up during the year.
Software, subscriptions, and technology
Accounting software, practice management systems, industry-specific tools, website hosting, and cloud storage are generally deductible. Computers and other equipment can often be deducted in the year you buy them, which we cover below.
Advertising and marketing
Website design, online ads, printed materials, signage, sponsorships with a clear advertising benefit, and marketing services are generally deductible.
Insurance
General liability, professional liability, commercial property, workers' compensation, and commercial auto insurance are generally deductible business expenses.
Professional fees
Fees paid to accountants, bookkeepers, attorneys, and consultants for business matters are generally deductible.
Wages and contractor payments
Wages you pay employees, along with the employer share of payroll taxes, are deductible. So are payments to independent contractors, provided you're meeting your 1099 reporting obligations.
Interest and bank fees
Interest on business loans, business credit cards, and equipment financing is generally deductible, as are business bank account fees and merchant processing fees.
Education and training
Courses, seminars, certifications, and continuing education that maintain or improve skills used in your current business are generally deductible. Education that qualifies you for a new line of work generally isn't.
Vehicles, Travel, and Meals
These categories draw the most attention from the IRS, because they're the easiest to blur with personal spending. They also have stricter record-keeping requirements than most other expenses.
Vehicle expenses
If you use a vehicle for business, you can generally deduct either the IRS standard mileage rate for your business miles or the business percentage of your actual vehicle costs, such as fuel, insurance, repairs, and depreciation. Either way, you need a record of your business miles. Driving between your home and your regular place of business is commuting, and commuting isn't deductible.
Business travel
When you travel away from your tax home overnight for business, costs such as airfare, lodging, and transportation are generally deductible. If you add personal days to a business trip, the costs need to be divided between business and personal.
Business meals
Meals with clients, prospects, or business contacts where business is discussed are generally 50% deductible, as are meals while traveling for business. Entertainment, such as sporting events, concerts, and golf outings, generally isn't deductible, even when business is discussed. Keep the receipt and a note of who attended and the business purpose.
Deductions Owners Often Miss
Home office
If you use part of your home regularly and exclusively for business, you may be able to deduct a portion of your home costs. Sole proprietors and single-member LLC owners generally claim this on their own return, using either a simplified square-footage method or actual expenses. S corp owners usually handle it differently: the company reimburses the owner through an accountable plan, rather than the owner deducting it personally.
Phone and internet
The business portion of your cell phone and home internet is generally deductible. If your phone is used about half for business, about half the cost may be deductible.
Equipment and furniture
Under current law, many businesses can deduct the full cost of qualifying equipment, computers, furniture, and machinery in the year the property is placed in service, through Section 179 expensing or bonus depreciation. Timing and planning matter here. Our post on year-end tax planning covers what to consider before making a purchase for the deduction.
Health insurance for owners
Self-employed owners may be able to deduct health insurance premiums for themselves and their families. For S corp owners holding more than 2% of the company, the premiums need to be reported on the owner's W-2 for the deduction to work. Our post on S corp salary vs. distributions touches on how this fits into payroll.
Retirement contributions
Contributions your business makes to a SEP-IRA, Solo 401(k), or other retirement plan can reduce your taxes while building savings. See our post on SEP-IRA vs. Solo 401(k) for how the two compare.
Startup costs
Costs incurred before your business opened, such as market research, training, and pre-opening advertising, may be partly deductible in your first year, with the rest deducted over time.
What Isn't Deductible
These generally don't qualify, even when paid from a business account:
- Personal expenses, including personal meals, groceries, and family vacations
- Commuting between your home and your regular place of business
- Entertainment, such as tickets to games and concerts
- Clothing you could reasonably wear outside of work
- Fines and penalties, including traffic tickets and IRS penalties
- Political contributions and lobbying expenses
- Federal income tax
Paying a personal expense with a business card doesn't make it deductible. It also muddies your books and, for corporations, can create questions about whether the business is being kept separate from its owners.
Common Deduction Myths
"It's a write-off, so it's basically free."
A deduction reduces the income you're taxed on. If you're in a combined 30% bracket, a $1,000 expense saves roughly $300 in tax. You're still out $700.
"I use my car for work, so I can deduct all of it."
Only the business portion is deductible, and you need a mileage record to support it. A vehicle used for both business and personal driving almost never qualifies as 100% business.
"I'll just keep my bank statements."
Bank statements show that you paid something, not what it was for. For many expenses, and especially for meals, travel, and vehicles, you also need receipts and notes on the business purpose.
Keeping Records That Hold Up
A deduction is only as strong as the records behind it. If your return is ever questioned, the burden is on you to show the expense was real and business-related.
- Use separate business bank and credit card accounts
- Save receipts digitally, ideally attached to the transaction in your bookkeeping software
- Keep a mileage log as you go, rather than reconstructing it at year-end
- Note the business purpose and attendees for meals
- Reconcile and categorize your books monthly
Colorado generally starts its income tax calculation from your federal taxable income, so deductions you properly claim on your federal return generally flow through to your Colorado return as well, with some adjustments.
How Latitude Helps
At Latitude Tax Advisors, finding deductions isn't something we do once a year at tax time. It starts with clean, well-categorized books, so legitimate expenses are captured as they happen rather than reconstructed in March.
From there, we look at the bigger picture: whether your business structure, retirement plan, and major purchases are set up to lower your tax bill, and whether your records will support the deductions you're claiming. The goal is to help you keep more of what you earn, with a return you can feel confident about.
Wondering if you're missing deductions? Latitude Tax Advisors works with small business owners to capture every legitimate deduction and keep records that hold up.
Frequently Asked Questions
What makes a business expense deductible?
An expense is generally deductible if it's ordinary and necessary for your business, meaning it's common in your industry and helpful and appropriate for your business. Personal expenses don't qualify, and mixed-use expenses are deductible only for the business portion.
Are business meals deductible?
Business meals with clients or business contacts, and meals while traveling for business, are generally 50% deductible. Entertainment, such as event tickets, generally isn't deductible.
Can I deduct my commute to work?
No. Driving between your home and your regular place of business is considered commuting and isn't deductible. Driving from your office to a client site or supplier generally is.
Can S corp owners take the home office deduction?
S corp owners usually don't deduct a home office on their personal return. Instead, the S corp can reimburse the owner for the business use of their home through an accountable plan, and the company deducts the reimbursement.
What records do I need to support my deductions?
Keep receipts or invoices showing what you bought, when, and from whom, along with the business purpose. Meals, travel, and vehicle expenses have stricter requirements, including mileage logs and notes on who attended business meals.
This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified professional for guidance specific to your situation.
