What Expenses Can a Small Business Deduct?

Running a business comes with many expenses. In general, a business may deduct expenses that are both ordinary and necessary. An expense does not have to be absolutely essential, but it must have a legitimate business purpose.

Depending on the type of business, deductible expenses may include:

• Advertising and marketing
• Employee wages and payroll taxes
• Payments to independent contractors
• Rent for an office or business location
• Business insurance
• Accounting and legal fees
• Office supplies and software
• Business travel
• Business meals, subject to applicable limitations
• Vehicle expenses related to business use
• Qualified home-office expenses
• Repairs and maintenance
• Interest on business loans
• Retirement-plan contributions
• Depreciation on equipment, furniture, vehicles, and other business property

The tax treatment depends on the type of expense and how it is used. For example, qualifying business meals are generally subject to a 50% limitation, while most entertainment expenses are not deductible.

Not every business purchase is deducted immediately.

Routine operating costs, such as office supplies and monthly software subscriptions, may generally be deducted in the year they are paid or incurred. Larger purchases, such as equipment, furniture, vehicles, or buildings, may need to be capitalized and depreciated over several years.

Some qualifying purchases may be eligible for Section 179 expensing, bonus depreciation, or another immediate-expensing provision. The applicable rules depend on the type of property, when it was placed in service, its business-use percentage, and the business's tax situation.

An expense does not become deductible simply because it was paid from a business bank account or credit card.

Personal, living, and family expenses are generally not deductible as business expenses. When an expense has both business and personal use, only the business portion may be deductible.

For example, if a cell phone is used 70% for business and 30% for personal purposes, the business may generally deduct only the properly supported business portion.

Business owners should keep receipts, invoices, bank statements, mileage logs, contracts, payroll reports, and other records that support their income and deductions.

Good records help identify deductible expenses, prepare accurate financial statements, complete tax returns, and support amounts reported if questions arise later.

Every business is different. A qualified tax professional can help determine which expenses are deductible and whether any special rules or limitations apply.