Business Expenses
Costs incurred in running a business that are deductible on your tax return if they are ordinary (common in your industry) and necessary (helpful and appropriate for your trade).
Business expenses are the costs of carrying on a trade or business. To be deductible, an expense must be both ordinary (common and accepted in your field) and necessary (helpful and appropriate for your business). These expenses are reported on Schedule C for sole proprietors or on the applicable business tax return.
Common deductible business expenses include: office rent and utilities, business insurance, professional services (accounting, legal), advertising and marketing, travel and transportation, office supplies and equipment, software and subscriptions, contractor and employee costs, and business meals (generally 50% deductible).
Capital expenses — those that provide a benefit lasting more than one year, such as equipment, vehicles, or building improvements — must generally be depreciated over time rather than deducted in full immediately. However, Section 179 and bonus depreciation rules may allow you to deduct the full cost of qualifying assets in the year they are placed in service, providing a significant upfront tax benefit.
How it works
Business expenses reduce your taxable business income, but only if they clear two tests the IRS applies to every deduction: the expense must be ordinary, meaning common and accepted in your line of work, and necessary, meaning helpful and appropriate for running the business. Personal expenses do not qualify just because they happen to relate loosely to work, and mixed-use costs generally need to be split between business and personal portions.
You report these on Schedule C under IRS-defined categories — advertising, insurance, legal and professional services, office expenses, supplies, travel, and so on — and each category total is subtracted from gross income to arrive at net profit. Business meals are a partial exception, generally only 50% deductible even when they are otherwise ordinary and necessary, which trips up people who expect a full write-off.
The main split that catches people off guard is current versus capital expenses: a routine repair or a box of supplies is deducted the year you pay for it, but an asset expected to last more than a year — equipment, a vehicle, a building improvement — normally has to be depreciated over time instead of expensed immediately. Section 179 and bonus depreciation are the two provisions that let many businesses deduct the full cost of qualifying capital purchases in the first year anyway, which is often confused with an ordinary expense deduction but works through a separate set of rules.
Example: splitting current expenses from a capital purchase
A small consulting business spends $3,000 on office supplies and software subscriptions during the year, and separately buys a $6,000 laptop and monitor setup expected to last several years.
The $3,000 in supplies and subscriptions is deducted in full as an ordinary business expense. The $6,000 equipment purchase is a capital expense, generally recovered through depreciation over its useful life unless Section 179 or bonus depreciation is used to expense it immediately instead.
Frequently asked questions
What makes an expense count as a deductible business expense?
Are business meals fully deductible?
Do I deduct a new piece of equipment the same way as office supplies?
Related Terms
Schedule C
The IRS form (Schedule C of Form 1040) used by sole proprietors and single-member LLCs to report business income and expenses. The net profit flows to your personal tax return.
Depreciation
A tax deduction that spreads the cost of a business asset over its useful life. Section 179 and bonus depreciation may allow full first-year expensing for qualifying assets.
Home Office Deduction
A deduction for the business use of your home, available to self-employed individuals. You can use the simplified method ($5 per square foot, up to 300 sq ft) or the regular method based on actual expenses.
Sole Proprietor
An individual who owns and operates an unincorporated business by themselves. Business income and expenses are reported on Schedule C of the personal tax return.