Small Business Tax Deductions: What Expenses Are Write‑Offable in 2025

Small business is a company with fewer than 500 employees that usually reports income on Schedule C. For these owners, knowing what counts as a tax deductible expense is the difference between paying extra tax and keeping cash in the bank. The IRS publishes detailed rules, but the core idea stays simple: if an outlay is both ordinary and necessary for the trade, it can lower taxable profit.

TL;DR

• Ordinary, necessary business costs are deductible.
• Major categories include operating expenses, cost of goods sold, capital assets, home office, vehicle, meals, and professional services.
• Use Schedule C (or Schedule E/F for partnerships) and Form 4562 for depreciation/Section179.
• Keep receipts, mileage logs, and invoices for at least three years.
• Avoid common mistakes like mixing personal and business spend or over‑claiming meals.

Understanding Tax‑Deductible Expenses

The IRS defines a deductible expense as one that is both ordinary (common in your industry) and necessary (helpful for business operations). This definition applies whether you run a coffee shop, a freelance design studio, or an e‑commerce store. The key is documentation: the agency will only honor a write‑off if you can prove the purpose and amount.

Two federal forms dominate the process. Schedule C is the profit‑or‑loss statement for sole proprietors. It breaks down expenses into line‑item categories, making it easy for the IRS to verify. For capital purchases-machines, computers, or vehicles-Form 4562 handles depreciation and the Section179 election. Understanding how these pieces fit together saves time at tax time and reduces audit risk.

Main Categories of Deductible Expenses

Below is a quick walk‑through of the most common buckets. Each one has its own documentation quirks, but all share the ordinary‑and‑necessary rule.

Operating Expenses

• Advertising includes online ads, flyers, and trade‑show booths. The cost is fully deductible the moment the ad runs.
• Utilities-electricity, water, internet-are deductible if they power the business location.
• Office supplies such as paper, printer ink, and pens qualify as short‑term expenses.

Cost of Goods Sold (COGS)

If you sell products, the cost of purchasing or manufacturing them can be deducted directly under COGS. This includes raw materials, wholesale inventory, and shipping fees for goods arriving at your warehouse.

Capital Expenditures

Big‑ticket items aren’t written off all at once. Instead, you spread the cost over several years via depreciation (the IRS’s systematic allocation method). However, the Section179 election lets you expense up to $1,160,000 of qualifying property in 2025, subject to a phase‑out threshold.

Home Office Deduction

For freelancers and remote‑run businesses, a portion of your home can be treated as a dedicated office. The deduction can be calculated using the simplified method (a flat $5 per square foot, max 300sqft) or the regular method (actual expenses multiplied by the business‑use percentage). The home office qualifies only if the space is used exclusively for business.

Vehicle Expenses

Two approaches exist: standard mileage rate (58.5cents per mile for 2025) or actual expense method (gas, maintenance, insurance). Whichever you choose, you must keep a mileage log-date, purpose, and miles driven. Separate personal trips from business trips to avoid disallowed portions.

Meals & Entertainment

Meals directly related to business (client lunch, travel meals) are 50% deductible. Entertainment expenses (concert tickets, sports events) are no longer deductible after the 2018 tax reform, so keep them out of the books.

Professional Services

Legal fees, accounting services, and consulting retain full deductibility. Even fees for filing the DBA, obtaining a business license, or paying a trademark attorney count.

Insurance

General liability, professional malpractice, and workers’ compensation premiums are deductible. Health insurance premiums for self‑employed individuals can be deducted above the line, reducing adjusted gross income.

Interest Expense

Interest on business loans, credit lines, and even credit‑card balances used for business purchases qualifies. Keep the loan agreement and statements to substantiate the claim.

How to Claim Deductions Properly

Step‑by‑step, this is the typical workflow for a sole proprietor:

1. Maintain a separate business bank account and credit card.
2. Record every expense in accounting software (QuickBooks, Xero, or a spreadsheet).
3. Attach a scanned receipt or digital invoice to each entry.
4. At year‑end, run a profit‑and‑loss report and export totals to Schedule C.
   • Line1: Gross receipts.
   • Lines8‑27: Specific expense categories (advertising, car & truck, contract labor, etc.).
5. If you have depreciation or Section179 claims, complete Form 4562 and attach it to your return.
6. File electronically via tax‑software or through a CPA.

Keeping records organized throughout the year eliminates the scramble in April. The IRS recommends a three‑year retention period, but many professionals keep documents for seven years to cover the statute of limitations on audits.

Comparison of Documentation Requirements

Common Mistakes to Avoid

Even seasoned owners slip up. Here are the top errors and how to fix them:

• Mixing personal and business spend. Use a dedicated card; if a personal purchase is later needed for the business, reimburse yourself with a written expense report.
• Over‑claiming meals. Only 50% is deductible, and the receipt must show the amount, date, location, and business purpose.
• Skipping mileage logs. The standard rate is great, but without a log the deduction is disallowed.
• Failing to apply Section179 correctly. The total equipment cost must be under the phase‑out threshold; otherwise, use regular depreciation.
• Neglecting COGS. Not subtracting inventory purchases inflates profit and tax liability.

Quick Deduction Checklist

• Separate bank account and credit card for business.
• Record every expense with date, vendor, amount, and purpose.
• Keep digital copies of all receipts (cloud storage recommended).
• Maintain a mileage log (apps like MileIQ simplify tracking).
• Review asset purchases for Section179 eligibility before year‑end.
• Run a profit‑and‑loss report early to spot missing entries.

Related Topics to Explore

Understanding deductions is just one piece of the tax puzzle. After mastering tax deductible expenses, you might want to dive into:

• Qualified Business Income (QBI) deduction - up to 20% off qualified net income for pass‑through entities.
• Tax credits for research & development, energy‑efficient equipment, and hiring veterans.
• Quarterly estimated tax payments to avoid penalties.
• Choosing the right business structure (LLC vs S‑corp) for tax efficiency.