Lowering your taxable income as a small business owner mostly comes down to correctly claiming what the IRS calls “ordinary and necessary” business expenses — the everyday costs of actually running the business. A lot of owners either miss deductions they’re entitled to or claim things incorrectly, so it’s worth knowing what typically qualifies before you file. (Quick note: this is general information, not personalized tax advice — a CPA or tax professional can confirm what applies to your specific situation.)
The Everyday Operating Costs
Cost of goods sold covers inventory, raw materials, and the direct labor that goes into producing whatever you sell. If you make or resell physical products, this is usually one of the biggest deductions on the list.
Rent and utilities for your office or storefront count too — electricity, internet, and phone service that’s actually used for the business.
Office supplies are smaller individually but add up: paper, ink, postage, and minor hardware purchases all qualify.
Marketing expenses are broader than people expect — social and search ads, logo design, printed materials, and web hosting all fall under this umbrella.
Software subscriptions are increasingly one of the biggest categories for a lot of businesses. SaaS tools, accounting software, and security systems are all deductible operating costs.
Vehicle and Travel Costs
Vehicle use for business purposes can be deducted either through the IRS’s standard mileage rate or by tracking actual costs — gas, maintenance, insurance — and splitting them based on business-use percentage. Pick whichever method actually saves more given how the vehicle gets used.
Travel expenses for overnight business trips cover lodging and transportation in full, and meals during that travel at 50%.
Client meals follow that same 50% rule — a business lunch or dinner with a client is deductible, but only half of the cost, not the whole bill.
Insurance, Professional Fees, and People Costs
Business insurance — general liability, cyber coverage, workers’ comp, business interruption insurance — is deductible as a straightforward cost of protecting the business.
Professional fees paid to an accountant, lawyer, bookkeeper, or tax preparer count as deductible business expenses, which is a nice bit of irony if you’re paying someone specifically to help you find more deductions.
Banking and interest costs including merchant processing fees (Stripe, PayPal, and similar) and interest on business loans are deductible too.
Payroll and benefits — employee wages, health and dental plans, retirement plan matching — represent some of the largest deductions for businesses with staff.
The Deductions People Tend to Miss
A few categories get overlooked more often than they should:
- Home office deduction — if you have a space used regularly and exclusively for business, you can deduct the corresponding percentage of rent and utilities.
- Startup costs — up to $5,000 in pre-launch expenses like market research and legal fees can be deducted, which matters if you spent money getting the business off the ground before it technically opened.
- Education expenses — industry workshops, trade books, and continuing education courses tied to your business are deductible.
- Retirement contributions — SEP IRA, SIMPLE IRA, or Solo 401(k) contributions reduce taxable income while also building retirement savings, which is a rare case of a deduction that directly benefits you personally too.
- Self-employment tax — you can deduct the employer-equivalent portion of the self-employment tax you pay, something a lot of sole proprietors don’t realize applies to them.
Where People Get Into Trouble
The most common mistake is mixing personal and business expenses and deducting the whole thing anyway — a personal cell phone bill, a non-business trip, a personal gift or meal claimed as a business expense. These mixed-use costs are exactly the kind of thing that draws audit attention if they’re claimed incorrectly or without documentation. Keeping digital receipts and using proper accounting software throughout the year makes a real difference if you’re ever asked to substantiate a deduction later.
