The IRS test is simple: an expense must be "ordinary and necessary" for your business. Ordinary means common in your industry. Necessary means helpful for running your business.
The obvious deductions:
- Office supplies and equipment
- Software and subscriptions you use for work
- Professional services (accounting, legal, consulting)
- Marketing and advertising
- Business insurance
- Wages paid to employees or contractors
The ones people underestimate:
- **Vehicle expenses**: Either track actual costs (gas, insurance, repairs, depreciation) OR use the standard mileage rate (70 cents/mile for 2025). Most people undertrack their business miles.
- **Home office**: If you're self-employed and have dedicated space, take it. Simplified method: $5/sq ft up to 300 sq ft = $1,500.
- **Retirement contributions**: SEP-IRAs let you contribute up to 25% of net self-employment income. Solo 401(k)s can go even higher. This is both a tax deduction AND building your retirement.
- **Health insurance**: If you're self-employed and not eligible for employer coverage, your premiums are deductible.
- **Education**: Courses, books, and training that improve your business skills.
The ones people overestimate:
- Meals: Only 50% deductible, and only if there's a clear business purpose
- Clothing: Almost never deductible unless it's a uniform you can't wear outside work
- Commuting: Driving to your regular office is NOT deductible
My advice:
Keep separate accounts. Use a business credit card. Track everything. The difference between "I think I spent about $3,000 on supplies" and "I have receipts showing $4,800 in documented expenses" is real money.
And if you're not sure about something? Ask before you deduct, not during an audit.
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