Can I write off business expenses on my personal taxes?
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Taking advantage of tax breaks is one of the best ways to save your small business money. When you write off business expenses, like supplies, equipment, and insurance premiums, you lower your tax liability. In non-accountant terms, this means you’ll owe the IRS less money.
And, if your small business is a pass-through entity, you can typically deduct those business expenses on your personal tax returns.
Let’s take a look at which businesses qualify, which expenses can (and can’t) be written off, and how to claim these business tax deductions on your personal return, so you can keep more of those hard-earned profits in your pocket.
When business expenses can be written off on your personal taxes
Small businesses that are pass-through entities don’t pay federal income taxes at the business level. Instead, profits and losses pass through to the owners’ personal tax returns, avoiding double taxation. Owners pay taxes on this income based on their individual income tax rates.
Common pass-through entities include:
Sole proprietors
Sole proprietors, often independent contractors and freelancers, can report business income and expenses directly on their personal tax returns using Schedule C (IRS Form 1040). A few key details:
- Business expenses are fully deductible
- Deductions reduce personal taxable income
- Owners pay federal taxes at their personal rate and self-employment taxes on all net profits
- Must keep personal and business expenses separate
Single-member LLCs
By default, a single-member LLC is treated as a disregarded entity for federal tax purposes, meaning the IRS doesn’t consider it separate from its owner. Instead, income and expenses flow through to the owner’s personal tax return using Schedule C (IRS Form 1040). Some important factors include:
- Business expenses are fully deductible
- Deductions reduce personal taxable income
- Owners pay federal and self-employment taxes on net profits
- Must keep personal business expenses separate
Partnerships
Partnerships and multi-member LLCs must deduct business expenses at the business level first. Each partner reports their share of net income on their personal tax return using Schedule K-1. Key things to keep in mind:
- Business expenses are deducted by the partnership, not directly from personal taxes
- Net income after expenses flows to personal tax returns
- Owners typically can’t deduct expenses personally
- Self-employment tax may apply to active partners
S corporations
S corps deduct business expenses at the corporate level. Shareholders must report their portion of net income on their personal returns using Schedule K-1. Some important details to consider:
- Business expenses are deducted by the S corp, not personally
- Net income after expenses flows to personal taxes via K-1
- Owners usually can’t deduct expenses personally
What counts as a deductible business expense
The IRS allows small businesses to deduct any expenses that are ordinary and necessary. This means to write something off, it must be:
- Common and acceptable in your business industry
- Helpful and appropriate for your trade or business operations
Eligible deductions typically include organizational costs, business insurance, payroll taxes, and vehicle expenses—but it varies depending on your business.
For example, photographers will often expense camera equipment, editing software, and studio rent, while contractors tend to write off tools, truck expenses, and equipment.
Common tax deductions for small business owners
Here are some of the business expenses most commonly deducted by small businesses:
| Deduction | Expenses Covered |
|---|---|
Home office |
|
Vehicle |
|
Equipment & supplies |
|
Marketing & advertising |
|
Professional services |
|
Business travel |
|
Startup costs |
|
Employee benefits |
|
Business property |
|
Expenses you typically cannot deduct
While there are many tax breaks small business owners can take advantage of, there are some things you usually can’t write off, including:
- Personal expenses, including grooming, clothing, and household items
- Commuting costs to travel from home to your regular place of business
- Travel expenses if you use a company car for personal use
- Entertainment expenses, such as sports or concert tickets, even if it’s for business
- Contributions to political parties or candidates
- Penalties and fees, like parking tickets or IRS fines
W-2 employees can’t deduct unreimbursed employee business expenses, as this deduction was suspended by the Tax Cuts and Jobs Act of 2017. So, if you’re an employee who pays out of pocket for tools, uniforms, travel, and other work-related expenses, you typically can’t write them off on your tax return.
How to write off business expenses on your personal tax return
Here’s how to claim business tax write-offs on your personal tax return:
Track your income and expenses
To make the filing process easier, taxpayers need to keep detailed records of all business finances. If the IRS questions your return, this documentation can verify your deductions and reduce your chances of an audit or penalties.
Here are some key documentation tips:
- Record all payments and 1099-NEC forms received
- Track mileage logs for all business-related travel
- Keep itemized receipts for gas, parking, hotels, airfare, and other eligible business trip expenses
- Maintain dated records detailing an expense’s business purpose, total amount, vendor, or any other information that can substantiate business use
- Use separate bank accounts and credit cards for personal and business finances
The IRS requires businesses to keep records for as long as they’re needed to support a tax return in case of an audit, which could be up to seven years.
Complete Schedule C (Form 1040)
When it’s time to file your taxes, you need to complete Schedule C, including this key information:
- Report your total business income
- Deduct your business expenses
- Calculate your net profit or loss
Once you have that net profit (or loss) amount, you must report it on Form 1040 for your personal return.
File additional forms if needed
Depending on the type of business you do, you may need to file additional tax forms, such as:
- Home office deductions: If you use a space in your home exclusively for business, you can use Form 8829 to deduct a portion of your utilities, internet, and mortgage based on the square footage of your office space.
- Depreciation deductions: To claim this deduction on equipment, machinery, computers, and other qualifying business assets, use Form 4562.
- Qualified Business Income (QBI) deduction: If you’re eligible for this deduction, you can write off up to 20% of your net business income with Form 8995 or 8995-A.
- Self-employment tax: The IRS allows eligible businesses to deduct half of the self-employment tax they pay using Schedule SE (Form 1040).
Small business owners can typically deduct the cost of business insurance from their taxable income.
Common tax mistakes small business owners make
If you’re a new business owner, filing taxes for the first year can feel daunting. To help make your tax season go smoother, here are some top common tax mistakes small business owners make—and how you can avoid them:
- Mixing personal and business finances, like using one bank account for both, makes it hard to identify deductions. Opening a separate account and a credit card for business simplifies bookkeeping.
- Failing to track mileage and keep receipts, which could mean losing out on tax savings. Using accounting software can help you track expenses year-round.
- Misclassifying hobbies as businesses can lead to hefty penalties and interest. The IRS considers it a business if you’ve made a profit in at least three of the past five years.
- Assuming tax extensions include payment, when the six-month deadline delay is exclusively for filing. Tax owed must be paid by the original deadline, regardless of extensions.
When to talk to a tax professional
Tax laws are constantly changing, tax credits and deductions get complicated, and mistakes can cost you a lot of money. A CPA or tax preparer can help you manage complex income streams, claim large deductions like equipment depreciation, or guide you through business structure shifts, such as making your sole proprietorship an S corp.
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