Guide to Business Tax Deductions for Small Businesses

In the US, the IRS says a business expense must be "both ordinary and necessary" to be deductible. IRS Publication 334 also explains which costs you capitalize instead and lists expenses you cannot deduct, and the IRS describes the records that support each expense. This page quotes the IRS rules for each step and gives one worked example.

Billed publishes this page. It gives general information about US federal tax rules, not tax advice. The rules are quoted from IRS Publication 334, Tax Guide for Small Business, for 2025 returns (page last reviewed or updated April 30, 2026), the IRS page on business records, and the 2025 Instructions for Schedule C, all opened on October 30, 2026. The IRS's Guide to business expense resources (last reviewed or updated June 27, 2026) says it has discontinued Publication 535, Business Expenses, and that "the last revision was for 2022". Ask your accountant how these rules apply to your business.

1. The ordinary and necessary standard (US)

IRS Publication 334 (2025) says:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

2. Expenses that are partly personal (US)

Publication 334 says: "If you have an expense that is partly for business and partly personal, separate the personal part from the business part. The personal part is generally not deductible."

Keep a record of how you worked out the business share, such as the miles driven or the time used for business. For vehicles, see how to track mileage for business.

3. Costs you capitalize instead (US)

Publication 334 says: "Generally, you must capitalize costs to acquire or produce real or tangible personal property used in your trade or business such as buildings, equipment, or furniture." It also says: "If property you acquire to use in your business is expected to last more than 1 year, you generally can't deduct the entire cost as a business expense in the year you acquire it." For depreciation, see what is tax depreciation. Publication 334 also describes a de minimis safe harbor for some purchases; ask your accountant whether it applies to you.

4. What the IRS lists under "Expenses You Cannot Deduct" (US)

Publication 334 says: "You usually can't deduct the following as business expenses." Its list includes:

• "Bribes and kickbacks."
• "Charitable contributions."
• "Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs."
• "Entertainment expenses."
• "Lobbying expenses."
• "Penalties and fines you pay to a governmental agency or instrumentality because you broke the law."
• "Personal, living, and family expenses."
• "Political contributions."

See Publication 334 for the full list.

5. Records to keep (US)

The IRS page What kind of records should I keep (last reviewed or updated August 3, 2026) says that for expenses, "Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was for a business expense."

6. Where a sole proprietor reports expenses (US)

The 2025 Instructions for Schedule C say: "Use Schedule C (Form 1040) to report income or (loss) from a business you operated or a profession you practiced as a sole proprietor." Partnerships and corporations file other returns; see the small business tax filing guide.

Topics covered on other pages

• Home office: how to claim home office expenses, based on IRS Publication 587.
• Self-employment tax, Schedule SE and estimated tax: freelance taxes.
• Depreciation: what is tax depreciation.
• Vehicle use: how to track mileage for business.

Worked example (sample figures, tax year 2025)

A sample sole proprietor, a designer invented for this example, had $48,000.00 of gross receipts in 2025. The sample assumes each business expense below meets the ordinary and necessary standard; whether yours do is a question for your accountant.

• Advertising: $1,200.00
• Accountant's fees: $450.00
• Supplies: $300.00
• Internet: $1,080.00 for the year, used 40% for the business, so the business part is 40% × $1,080.00 = $432.00 and the personal part of $648.00 is left out
• Parking fine: $150.00, left out because Publication 334 lists "Penalties and fines you pay to a governmental agency or instrumentality because you broke the law" under expenses you cannot deduct

Business expenses in the sample: $1,200.00 + $450.00 + $300.00 + $432.00 = $2,382.00

Gross receipts less these expenses: $48,000.00 − $2,382.00 = $45,618.00

The sample doesn't work out any tax owed. The 40% business share is a sample figure; your own share comes from your records.

Where Billed fits

Billed's expense tracking page says: "An expense in Billed records who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry." It adds that "Billed's expense report can group your expenses by category" and that "Reports can be filtered by date range and exported for your accountant, bookkeeper or tax software."

When this guide isn't for you

This page covers US federal rules for small businesses. If you have inventory, employees, assets to depreciate, a home office, or business in more than one state or country, the rules go further than this page. State tax rules differ from federal rules. Ask your accountant.

Related Articles

• Small Business Tax Filing Guide
• Freelance Taxes: U.S. Essentials
• How to Claim Home Office Expenses
• What Is Tax Depreciation?
• How to Track Mileage for Business

Frequently Asked Questions

What makes a business expense deductible in the US?

IRS Publication 334 (2025) says a business expense must be "both ordinary and necessary": "An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business."

What if an expense is partly personal?

Publication 334 says: "If you have an expense that is partly for business and partly personal, separate the personal part from the business part." It adds: "The personal part is generally not deductible." Keep a record of how you worked out the business share.

Are fines and penalties deductible?

Publication 334 says "You usually can't deduct the following as business expenses" and lists "Penalties and fines you pay to a governmental agency or instrumentality because you broke the law." Ask your accountant about any other penalty.

What records does the IRS say to keep for expenses?

The IRS says: "Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was for a business expense."

Is IRS Publication 535 still current?

No. The IRS says it has discontinued Publication 535, Business Expenses, and that the last revision was for 2022. For business expenses, its guide points to resources including Publication 334, Tax Guide for Small Business.