Small Business Tax Deductions: What Counts and What to Keep

Most guides to small business tax deductions are a list of categories you already know about. The list is the easy part. What decides whether a deduction survives is whether the expense meets the IRS test, whether you can show it was for the business, and whether you kept anything to prove it. This page covers that test, the record-keeping that makes it stick, and links to the individual deductions worth their own guide.

The test behind every small business tax deduction

Before any category matters, an expense has to clear one bar.

IRS Publication 334 states it in a single sentence: “To be deductible, a business expense must be both ordinary and necessary.” Both words are doing work, and neither means what people assume.

• Ordinary. Publication 334: “An ordinary expense is one that is common and accepted in your field of business.” The reference point is your industry, not general common sense. Specialist equipment that would look extravagant in another trade can be entirely ordinary in yours.
• Necessary. Publication 334: “A necessary expense is one that is helpful and appropriate for your business.” The next sentence settles the question people actually have: “An expense does not have to be indispensable to be considered necessary.”

That pairing is more permissive than most owners expect and less permissive than the internet suggests. It admits a great deal of ordinary business spending. It does not admit something you bought mainly for yourself and later decided to call a business expense.

The IRS publication you will still see cited no longer gets updated

Publication 535, Business Expenses, has been discontinued, and guidance written against it has not all caught up.

The IRS says so directly on its guide to business expense resources: “We have discontinued Publication 535, Business Expenses; the last revision was for 2022.” That page now maps each former topic to the resource that replaced it. One concrete example it gives: the worksheet that used to sit in chapter 6 is now Form 7206, Self-Employed Health Insurance Deduction.

This matters for a practical reason rather than a pedantic one. If you follow a guide that cites Publication 535 and go looking for chapter and verse, you will land on a 2022 document that the IRS has retired, and you will not see anything that changed since. It is still being cited: one of the higher-ranking guides on this topic links to Publication 535 as a live source. When you are checking a deduction, check it against a current publication.

What counts as a deductible business expense?

Anything that passes the ordinary and necessary test and is genuinely for the business rather than for you. Most small business tax deductions are unremarkable running costs rather than anything clever.

The familiar categories are familiar for a reason, and a good general list covers supplies and materials, rent or the business use of your home, utilities tied to the business, insurance, professional and legal fees, advertising and marketing, software and subscriptions, vehicle and travel costs for business journeys, employee wages, and interest on business borrowing.

Two things sit outside that list and confuse people constantly.

Cost of goods sold is not a deduction in the usual sense. If you keep an inventory, what you paid for the goods you actually sold is figured separately, in Part III of Schedule C, and it feeds into gross profit rather than sitting alongside your other expenses. Publication 334 puts the sequence plainly: “You must determine gross profit before you can deduct any business expenses.”

There is an exception worth knowing, because it covers a lot of small operations. The Part III route is stated conditionally, for taxpayers who choose to keep an inventory. Publication 334 allows an inventory method that either treats inventory as non-incidental materials and supplies, “or conforms to your financial accounting treatment of inventories”. On the first of those, the timing lands in much the same place, because such inventory “is used or consumed in your business in the year you provide the inventory to your customers”; what changes is the form line and the label rather than the year. Which methods are open to you depends on your accounting, and it is worth confirming with an accountant rather than picking one from a guide.

Not everything is deducted in the year you spend it. The test is how long it lasts rather than how much it cost. Publication 334: “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.” You spread it over more than one tax year through depreciation instead. That is the default rather than the whole story. The Section 179 deduction lets you elect to deduct a limited amount of the cost of certain depreciable property in the year you put it into service, so a durable item is not automatically something you write off slowly. A separate election runs the other way, letting you treat certain repairs or replacements as improvements subject to depreciation. Which route applies to a specific purchase is genuinely a question for your accountant rather than for a blog, and the answer can change your tax bill in either direction.

Mixed personal and business use is where claims fall apart

The phone you also take on vacation, the car that does the school run, the room you work in and also watch television in. In our reading this is the shakiest ground in small business tax deductions.

Almost nothing in a small business is used exclusively for the business, and the tax system knows that. What it asks is that you claim the business share and can show how you arrived at it. The failure mode is not usually fraud; it is claiming a round number with nothing behind it.

Two of the most common mixed-use claims have rules specific enough to deserve their own treatment, and we have written both up separately:

• The home office deduction, where the exclusive-use test is stricter than most people expect and employees do not qualify at all.
• Whether website costs are deductible, which covers how build costs and running costs are treated differently.

The general principle underneath both: work out the business proportion honestly, write down how you calculated it at the time, and keep whatever supports it.

How to track and categorize business expenses for taxes

This is the part the category lists skip, and it is the part that determines which small business tax deductions you can actually keep.

When we looked at what people search around this topic, nearly every question was operational rather than definitional. Not “what is deductible” so much as how to track, categorize, organize and keep records of expenses. That is the right instinct, because a deduction you cannot evidence is one you will not keep if anyone asks.

What that looks like in practice:

• Separate the money first. A dedicated business account does more for your record-keeping than any app. It turns categorization from a memory exercise into a filtering exercise.
• Categorize as you go, not in April. Reconstructing a year of receipts from memory is where invented numbers creep in, and invented numbers are the ones that do not survive scrutiny.
• Match your categories to Schedule C. If your bookkeeping uses the same buckets as the form you will file, the return becomes transcription rather than translation.
• Write down the reasoning for anything mixed-use. The percentage matters less than being able to explain where it came from a year later.
• Keep the receipt and the context. A card statement shows an amount and a merchant. It does not show what the expense was for, which is the part that establishes it was ordinary and necessary.

Deductions worth their own guide

Some small business tax deductions have enough rules attached that a line in a list is not enough.

• Home office deduction: who qualifies, the two calculation methods, and why employees are excluded.
• Website and online costs: how build costs and running costs are treated differently.
• Small business tax basics: the wider picture around filing, if deductions are not the only thing you are trying to work out.

Frequently asked questions

What are small business tax deductions?

Small business tax deductions are business expenses you subtract from your business income before tax is calculated, which lowers the profit you are taxed on. To qualify, IRS Publication 334 says an expense must be both ordinary, meaning common and accepted in your field, and necessary, meaning helpful and appropriate for your business.

How do business tax write offs work?

A write-off reduces taxable profit rather than reducing your tax bill directly. Spending $100 on a deductible expense does not save you $100; it removes $100 from the income you are taxed on, so what it is worth depends on your rate. It is an easy thing to misread, and it changes how much a deduction is actually worth chasing.

What are tax write offs for small business?

The usual small business tax deductions are supplies, rent or business use of your home, utilities, insurance, professional fees, advertising, software, business travel and vehicle use, wages, and interest on business borrowing. Whether any specific item qualifies comes back to the ordinary and necessary test rather than to whether it appears on a list like this one.

How do I track business expenses for taxes?

Use a separate business bank account, categorize transactions as they happen rather than at filing time, match your categories to the lines on Schedule C, and keep receipts with enough context to show what each expense was for. For anything used personally as well as for the business, record how you worked out the business share at the time.

How do I categorize business expenses for taxes?

Mirror the expense categories on Schedule C, because that is where the numbers end up. If you keep an inventory, keep cost of goods sold separate from ordinary expenses, since it is figured in Part III rather than deducted alongside them. Flag mixed-use items separately too, so the business percentage is visible rather than buried.

What is the difference between a deduction and cost of goods sold?

If you keep an inventory, cost of goods sold is what you paid for the goods you actually sold, figured in Part III of Schedule C. It feeds into gross profit, and Publication 334 says “You must determine gross profit before you can deduct any business expenses”, so ordinary expenses come off after that. A small business taxpayer who does not keep an inventory may instead use a method that treats those costs as non-incidental materials and supplies, or that follows their financial accounting treatment of inventories. Counting the same cost twice is an easy error either way.

Can I still use IRS Publication 535?

Not as current guidance. The IRS states that it “discontinued Publication 535, Business Expenses” and that “the last revision was for 2022”, though the 2022 PDF is still available. Its guide to business expense resources maps each former topic to the current replacement, and the self-employed health insurance worksheet that used to be in chapter 6 is now Form 7206. A guide ranking on the first page for this topic still links to Publication 535, so treat a citation to it as a prompt to check the current source.

Which tax year do these rules apply to?

The definitions here come from IRS Publication 334, whose current edition is written for use in preparing 2025 returns, read on 1 September 2026. The IRS republishes it each year, so check the edition for the year you are filing before relying on any detail, and speak to an accountant about your own circumstances. This article is general information, not tax advice.

Sources

• Internal Revenue Service, Publication 334, Tax Guide for Small Business, edition for use in preparing 2025 returns, read 1 September 2026.
• Internal Revenue Service, Guide to business expense resources, which records the discontinuation of Publication 535, read 1 September 2026.