• Small business owners, including sole proprietors, may be able to use a variety of deductions for reducing their tax bills. 
• Tax deductions reduce taxable income, and can result in a lower tax liability. 
• Keep good records of expenses, and use accounting software to help maximize deductions. 

Writing off business expenses can lower your tax bill, and make paying for the items your business needs a little less painful. 

But what does that mean, and how do you write off business expenses?

Tax deductions (or “write offs”) are subtracted from your income. They reduce your taxable income, which in turn reduces the amount of state, federal or local income taxes you’ll pay. We’ll explain what, how and why in this article.

How To Write Off Business Expenses:

Your small business may be able to write off many business expenses by claiming them as deductions on your income tax returns. However, a few expenses are not tax deductible, or the tax deduction must be taken over time.

Most very small and small businesses are considered pass through entities. That means the income and expenses from your business flow through to your personal income tax return. You report the income (or loss) from your business when you file your personal income taxes.

Here’s a very simple step-by-step of how it works for pass through entities (again, the majority of small businesses):

• You make a purchase for your business that is tax deductible under IRS code.
• You (or your bookkeeper or accountant) record that expense in your accounting software. 
• You keep documentation of the purchase in case the IRS audits your business or questions your deduction. 
• You subtract that expense from your income when determining how much profit your business has made.
• You then report business income and expenses on relevant tax forms, and include the income from your business on your personal tax return.

Myths About Writing off Small Business Expenses

Spend some time on YouTube or social media and you may think that everything is tax deductible. But there are rules around what’s deductible and what’s not, as well as how you need to document those expenses.

There are some common misconceptions about tax deductions that can trip up small business owners. These include:

• I can’t take deductions if I am self-employed or a freelancer..
• Everything is deductible if I form an LLC or corporation. 
• If I use a vehicle, for my business I can automatically write off 100% of the costs. 
• Tax deductions only apply if I make a profit. 
• It’s not worth the paperwork to take deductions. 
• Deductions will just increase my chances of being audited. 

It’s important to separate fact from fiction so you can make the best financial decisions for your business. 

Perhaps the biggest trap that entrepreneurs can fall into is overspending to get tax deductions. Even if you write off an expense, you still must spend that money in the first place. Be strategic about your expenses so you don’t wind up in debt. 

The second trap is trying to expense everything to lower taxable income. This sometimes backfires on entrepreneurs, said tax professional Carolyn Walters in a recent tax webinar for Nav. 

“It’s great to have losses because it helps reduce your taxable income,” Walters says. But if you are trying to grow your business or get funding, it could be a problem. 

Documentation Needed To Write Off Expenses

The IRS says that deductible business expenses must be “…both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business” 

The type of business expense will help determine what kinds of records you need to keep. For business expenses, for example, the IRS says documentation may include:

“Supporting documents should identify the payee (the person or company paid), date of purchase, amount paid, proof of payment (such as a receipt), the date incurred, and a description of the item purchased or service.” This helps establish it was for an ordinary and necessary expense.  Specific documentation can include: 

• “Canceled checks 
• Cash register tape receipts
• Account statements
• Credit card receipts and statements
• Invoices”

Sometimes you may need a combination of these documents. For example, if you buy a series of items at an office supply store and paid for it with a business credit card, your credit card statement may show that you made the purchase, but the receipt can help establish what you purchased and that it was for business purposes.

Major Categories of Business Expenses

Here are some important categories business expenses you don’t want to overlook:

Business loan interest

If you have a small business loan and/or small business credit card you used to finance business expenses over time, you will probably be able to deduct the interest your business pays. Fees may be deductible as well, including business bank account fees.

Home office expenses

If you have a designated office space in your home, and you use it exclusively and regularly as your principal place of business, you may qualify for a home office deduction. You may qualify whether you own or rent. 

You can use one of two methods to write off these costs. The regular method allows you to deduct actual expenses based on the percentage of your home used for business, while the simplified method allows you to base your deduction on the square footage of your home used for business purposes. For 2023, the simplified method offers $5/square foot, up to a total of 300 square feet. 

Business use of a vehicle

You may be able to write off business use of a vehicle even if you don’t use it exclusively for business. (A vehicle used 100% for business purposes also provides tax deductions.) 

Similar to the home office deduction, there are two options for deducting truck and car expenses: the actual expense method and the standard mileage rate method. For 2023, the standard business mileage rate is 65.5 cents per mile. 

It’s crucial you keep careful track of business use of your vehicle by logging the date, miles traveled and business purpose of each trip. You may be able to separately deduct actual expenses for parking and tolls as long provided they are not commuting expenses. 

Phone and internet expenses

If you need a cellphone, virtual phone number, or a landline for your business, you may be able to write off part or all of that expense. You may also be able to write off part or all of your internet bill, even if you run your business from home. Be careful with this one: if you use your cell phone partially for business and partially for personal use, your tax deduction may be reduced. 

Business meals

For the 2023 tax year, businesses are generally able to deduct 50% of the cost of a business meal if traveling away from home for business, or buying a meal while at a convention, for example. (There was an enhanced deduction for 2021 and 2022.) There are some restrictions; meals can’t be extravagant, for example, and special rules apply to entertainment events. 

Business travel 

Your business may be able to expense business travel expenses when employees need to travel from their tax home or main place of work overnight for business purposes. As always, they must be necessary and ordinary. 

There are two methods that can be used here: the actual expense method or the per diem method which provides a fixed amount. There is a per diem rate for combined lodging and meal costs, and a per diem rate for meal costs alone. (If you are self employed you can only use the per diem method for meals.) IRS Publication 1542 lists per diem rates for travel within the US.

Legal and accounting expenses

Did you form an LLC or corporation? Did you hire an attorney to create a contract, or advise you on a legal matter? Purchase a legal form template?

Or perhaps you paid for accounting software or tax preparation software, bookkeeping services, or hired a tax professional like a CPA or EA to help you file your income tax returns. 

And in 2023, you may need to pay a legal or accounting professional to help you file FINCEN forms. 

These costs and professional fees are generally tax write-offs. 

Business insurance

Businesses often need various types of business insurance: general liability insurance, property insurance, business interruption insurance, professional liability insurance, worker’s compensation insurance and more. Business insurance premiums can usually be written off. 

Employee and contractor expenses

Whether you have employees on payroll, or you hire independent contractors to provide services to your business, you can usually write most or all of those costs off. (With regard to payroll taxes, you can’t take a deduction for the amounts you withhold from an employee’s pay for FICA taxes, which covers Social Security and Medicare, for example, but you can likely deduct the employer’s portion.) 

You should also generally be able to write off bonuses and commissions provided they meet IRS requirements. 

Employee benefits such as the amount your business contributes to employee’s health savings accounts (HSAs), health insurance, or retirement plans, employer paid insurance such as life insurance and pet insurance, and other benefits may be deductible. 

If you are an owner-employee of an S corporation with greater than 2%, contributions to an HSA are taxable to the owner employee, but still deductible to the business. 

Marketing and advertising

Businesses can typically write off the expenses associated with marketing their business. This could include paid advertising online or offline, website expenses, social media marketing, print materials like business cards or direct mail, and much more. 

Education and training

Educational expenses your business covers for training such as workshops or conferences, as well as expenses for professional books or subscriptions are often deductible. 

Startup costs

When you start a business, you’ll want to keep careful track of all expenses as some may be tax deductible. Businesses may be able to deduct up to $5000 in startup expenses and up to $5000 in business formation costs to set up a business entity such as an LLC, S Corp etc. 

Taxes

Some business taxes, like state income taxes, business property taxes or real estate taxes, and worker unemployment taxes, are generally deductible expenses. 

Depreciation

Depreciation allows you to recover the cost or other basis of certain property over the time you use the property. You may be able to depreciate property such as real estate, vehicles, or equipment you use in your business or for income-producing activity. There are several methods of depreciation available, along with bonus depreciation. IRS Publication 946 discusses depreciation in detail or consult your tax advisor.  

Running the Numbers Each Year

Each year, you’ll need to keep track of business income and expenses, and use that information to calculate your business profit and loss. 

It will be a lot easier to keep track of your business expenses if you use a business checking account and a business credit card. Mixing personal expenses with business expenses may mean you’ll lose out on valuable deductions. 

If you operate your business as a sole proprietorship, you’ll file Schedule C with your personal income tax return to report income or losses from business activities. 

S Corporation shareholders usually file Form 1120-S and file a K-1 with their personal tax returns.

LLCs use different forms, depending on whether they have more than one member and whether they choose to be taxed as an S corp, for example. A single-member LLC will usually file Schedule C unless it has elected to be taxed differently. 

Partnerships file IRS Form 1065 to report income and losses. 

For your personal taxes, use Schedule A to list itemized deductions such as mortgage interest. That’s for taxpayers who choose not to take the standard deduction. These deductions can reduce your gross income on your personal taxes. 

Setting up Accounting to Track Expenses

It’s a good idea to set up accounting software to track business income and expenses. Staying current on your business bookkeeping also has additional benefits beyond tax purposes. 

If your business needs to borrow money, having this information handy may help. Some lenders (especially banks) may want to see profit and loss statements or other financial documentation, for example. 

Accounting Software for Business Taxes

Unless you hire someone to do your bookkeeping you need bookkeeping software. It makes it easy to track business income and expenses. Visit Nav’s accounting resource center to find options for your business. The sooner, the better. It’s stressful to try to play catch up when an IRS due date is looming.

Frequently Asked Questions

Here are some answers to frequently asked questions. Again, always be sure to consult IRS Small Business and Self-employed Tax Center and/or your tax professional for specific information.

How many business expenses can you write off?

You may claim as many tax deductions as you qualify for. You shouldn’t be afraid to take legitimate business tax deductions. However, excess business losses may have to be carried forward to future tax years.

Here are some of the top tax deductions for small business owners. 

Are business expenses 100% write-offs?

Not all business expenses are 100% deductible. While many ordinary and necessary expenditures—such as office supplies, business insurance, and professional services—can be fully deducted, others may be only partially deductible. 

In other words, some business expenses are fully deductible, some are partially deductible, and some may not be deductible at all.

A popular example: business meals are usually 50% deductible, but if you buy meals for employees at a holiday party or team building event, they are likely 100% deductible. On the other hand, buying meals at a sports venue may not be deductible unless you can get an itemized receipt to qualify for the 50% meal deduction.

Some costs, like the purchase of business assets such as equipment or vehicles, may qualify for a depreciation deduction over several years instead of being fully written off in the year of purchase.

Understanding which small business tax deductions apply fully, partially, or over time is key to accurate tax reporting and avoiding penalties. When in doubt, consult a tax professional or review relevant IRS tax forms like Schedule C or Publication 946.

How do I write off expenses for my LLC?

Keep track of your business expenses, and keep documentation, such as receipts and records of purchases. You can write off many business-related expenses for your LLC. When you prepare your tax returns you can either use tax preparation software or work with an accounting professional to document your business income and expenses.

LLCs are pass through entities which means the income (or loss) from the business flows through to member’s personal tax returns. The form you’ll file to report LLC taxes depends on how many members the LLC has and how it elects to be taxed. 

IRS Publication 3402, Taxation of Limited Liability Companies can be helpful. 

Are all business expenses 100% tax deductible?

No. Some business expenses are fully deductible, some are partially deductible, and some may not be deductible at all.

Example: business meals are usually 50% deductible, but if you buy meals for employees at a holiday party or team building event, they are likely 100% deductible. On the other hand, buying meals at a sports venue may not be deductible unless you can get an itemized receipt to qualify for the 50% meal deduction. 

Do you need receipts to write off business expenses?

It’s best practice to keep copies of receipts for tax purposes. But they may not always be required. Alternative documentation may suffice, depending on the situation. For example, if a vendor did not provide a receipt, you may be able to document an expense with a copy of the invoice along with a canceled check or a charge on your credit card statement. 

Can I write off business expenses on my personal taxes?

If you are a sole proprietor, freelancer, or a single-member LLC, your business is considered a pass-through entity. This means you report business income and expenditures on your personal tax return, typically using Schedule C. You then pay taxes on your personal income tax at your personal tax rate. 

Legitimate expense deductions—such as qualified business vehicle expenses, business use of your home, and marketing costs—can lower your taxable income and reduce your self-employment tax liability.

However, it’s important to keep personal and business transactions separate. Using a dedicated business checking account and tracking tools will help support your deductions if audited.

Are travel expenses tax deductible?

Yes, business travel costs are often deductible if the trip is ordinary, necessary, and conducted away from your tax home. This includes transportation, lodging, and 50% of meal costs. If the business trip involves both personal and business activities, only the expenses directly related to the business portion are eligible for deduction.

You can deduct actual expenses or use the per diem method for meals and incidental costs. 

But this is often an area where business owners get bad advice, or try to deduct expenses that aren’t really deductible. They may try to turn leisure travel into business travel by holding a meeting during a week-long trip, for example, or by fitting in a few business-related activities. 

When in doubt, consult your tax advisor. As always, be sure to keep detailed records and receipts to support the deductions, and note that commuting costs between home and a regular work location are not deductible.

What is the $2,500 expense rule in business taxes?

Under current tax code, businesses may immediately deduct purchases of tangible property up to $2,500 per item or invoice as a de minimis safe harbor election.d This rule helps small businesses avoid tracking and depreciating smaller business assets over multiple years. It applies to items such as laptops, tools, or office furniture, provided they’re used for business purposes and not capitalized under another rule.

This election must be consistently applied and documented. It’s especially helpful for reducing the administrative burden of tracking minor asset depreciation deductions.

Will recent staffing cuts at the IRS affect tax deductions?

Staffing changes at the IRS may impact processing times for refunds or responses to inquiries, but they don’t change the rules around small business tax deductions or audits. Tax deductions are written into IRS code, which may then be interpreted in Tax Court.

However, reduced IRS capacity may lead to delays in issuing updated guidance or processing amended returns.