Business Expenses Explained: What Counts (and What Never Does)

Let’s be real: few things in business feel more tedious than dealing with expenses.

Tracking every receipt, logging mileage, or figuring out whether that client dinner is 50% or 100% deductible isn’t exactly anyone’s idea of fun. But here’s the truth: if you want to lower your tax bill and keep more of your money, you can’t afford to get this wrong.

THE PROBLEM? Business expenses aren’t always straightforward. The IRS uses terms like ordinary and necessary that sound simple, but in practice leave plenty of gray area. That’s why so many entrepreneurs either play it too safe (and miss deductions) or get aggressive (and risk a letter from the IRS).

We’ve written this guide to clear things up. It explains:

• What business expenses actually are.
• Which costs qualify — and which never do.
• The IRS rules you need to know.
• Common pitfalls (like mixing personal and business spending).

It’s not theory. It’s the practical framework we’d want if we were starting from scratch — backed by IRS guidance, and written so you can apply it today.

Let’s dive in.

What Are Business Expenses?

At its core, a business expense is simply the cost of keeping your business running. The IRS defines it as any “ordinary and necessary” expense required to carry on a trade or business (Publication 535).

What does that really mean?

• Ordinary = common and accepted in your line of work. (Every café buys coffee beans. Every consultant pays for Zoom.)
• Necessary = helpful and appropriate for your business. (You don’t need an ad campaign to exist, but you do need one to grow.)

In plain English: it’s money you spend for your business, through your business, to help it operate or expand.

Think of everyday costs like:

• Paying for software subscriptions (QuickBooks, Adobe, Zoom).
• Covering office rent and utilities.
• Paying employee wages and benefits.
• Running marketing campaigns to attract new customers.

Here’s the key distinction—personal living costs never count. Your grocery bill, your Netflix subscription, or the gas you spend commuting from home to your office aren’t deductible. But if you buy a laptop exclusively for work or spend money on ads to reach clients, those are legitimate business expenses.

Example: Imagine you’re a freelance graphic designer. Buying a MacBook Pro that you use every day for client projects? That’s a deductible business expense. Grabbing a Starbucks latte on the way to the coworking space? Sorry, that’s personal spending—no matter how much caffeine fuels your creativity.

The bottom line: if an expense is both ordinary in your industry and necessary for your operations, the IRS will usually allow you to deduct it.

What Counts as a Business Expense?

Not every dollar you spend is deductible just because it passes through your business account.

For the IRS, an expense must be both:

• Ordinary — common and accepted in your field.
• Necessary — helpful and appropriate for your business.

Put simply: if another business like yours would typically incur the same cost, and if that cost directly supports your operations, it usually qualifies.

Core categories of deductible expenses include:

• Staff costs — payroll, uniforms, employee perks.
• Freelancers/contractors — fees for outsourced projects or services.
• Office rent and utilities — the space you work from and the bills that keep the lights on.
• Stationery, equipment, and software — from printer paper to project management tools.
• Administrative fees and insurance — bank fees, liability insurance, professional memberships.
• Marketing and advertising — Google Ads, social media campaigns, website hosting.
• Interest on business debt — credit cards, loans, or lines of credit used for business purposes.

The golden rule: if an expense is both ordinary in your industry and necessary to keep your business running or growing, it belongs on your deductions list.

Types of Common Business Expenses (IRS Framework)

The IRS breaks down business expenses into several categories. Knowing these helps you classify costs correctly, avoid mistakes, and maximize deductions.

1. Operating expenses

Day-to-day costs of keeping the business running.

• Rent for office or storefront
• Utilities like electricity, internet, water
• Office supplies

2. Employee pay & benefits

Everything you spend to compensate employees.

• Wages and salaries
• Bonuses and perks
• Health insurance (self-employed individuals can deduct premiums through Form 7206)

3. Taxes & licenses

Mandatory payments to federal, state, and local authorities.

• Business taxes and franchise fees
• Professional licenses and permits

4. Insurance

Protecting your company from risks.

• General liability and property insurance
• Workers’ compensation
• Self-employed health coverage (IRS rules apply)

5. Interest & debt expenses

Borrowed money isn’t free — but interest is often deductible.

• Business loan interest
• Credit card interest tied to business purchases
• Subject to limits under Section 163(j)

6. Travel & meals

Client meetings, business trips, and staff events.

• Meals are generally 50% deductible
• 100% deductible in certain cases (e.g., holiday parties)

7. Marketing & advertising

Anything used to attract and retain customers.

• Google or Facebook ads
• Website hosting and domain costs
• Print or digital promotions

8. Professional fees

The expertise you hire.

• Lawyers, accountants, consultants
• Tax preparation and compliance services

9. Depreciation & amortization

For assets that last more than a year.

• Computers, vehicles, office furniture
• Intangible assets (e.g., patents, trademarks)

10. Other expenses

IRS allows deductions in specific cases.

• Bad debts from unpaid invoices
• Education or training (to improve existing skills)
• Charitable contributions (with limits)

👉 Pro tip: Each category has its own IRS rules and exceptions. Keeping receipts, contracts, and digital proof ensures you can back up every deduction if ever questioned.

Types of Common Business Expenses (IRS Framework)

The IRS groups deductible expenses into categories.

Here’s a quick-reference table showing what’s allowed — and the mistakes to avoid.

Deduct vs. Capitalize: Knowing the Difference

Not all expenses are treated the same at tax time. The IRS requires you to either deduct or capitalize a cost, depending on its nature and lifespan (Publication 535).

• Deductible expenses are short-term, recurring costs that keep your business running. You claim them in the year you spend the money.
• Capitalized expenses are big-ticket purchases that provide value for more than one year. Instead of writing them off at once, you spread (depreciate or amortize) the cost over time.

Quick Comparison

Special Expense Rules Every Business Owner Should Know

Some deductions come with extra conditions. These are the ones that trip people up most often:

1. Home office deduction

You can deduct part of your home expenses (rent, mortgage interest, utilities) only if the space is used exclusively and regularly for business. Your kitchen table doesn’t count — but a dedicated home office does.

2. Vehicle deductions

Two ways to write off car use:

• Standard mileage rate (set annually by the IRS — simple, no receipts needed except mileage logs).
• Actual expense method (gas, maintenance, insurance, depreciation).
  Choose the one that gives you the bigger deduction, but remember: commuting to your office usually doesn’t qualify.

3. Meals

• 50% deductible when tied to business purposes (client lunches, staff meals).
• 100% deductible in limited cases, such as office holiday parties or events provided for the benefit of employees.

4. Start-up and organizational costs

When launching a business, you can deduct up to $5,000 in start-up costs (like market research, legal fees, incorporation paperwork) and $5,000 in organizational costs (like LLC filing fees). Amounts beyond that are amortized over 15 years.

5. Self-employed health insurance

If you’re self-employed, you can deduct the cost of premiums for medical, dental, and vision insurance for yourself, your spouse, and dependents — even a child under 27 at year-end, whether or not they’re your dependent.

• This deduction is calculated on Form 7206.
• It applies only if the policy is established under your business (or S-corp, if you’re a 2%+ shareholder).

👉 Takeaway: These special rules can save you thousands — but only if you follow the fine print. Keep receipts, mileage logs, and policy documents handy in case the IRS asks questions.

Food, Drink, and Entertainment Expenses

Few categories cause more confusion than meals and entertainment. The IRS rules here are strict — and a little counterintuitive.

What you can deduct

• Client meals & employee outings — Generally 50% deductible if the purpose is directly tied to business.
  Example: Taking a client to lunch to discuss a project, or buying pizza for staff working late.
• Holiday parties & office events — Often 100% deductible, provided they’re primarily for employees.
  Example: An annual holiday party at a restaurant for your staff.

What you can’t deduct

• Solo coffee runs — A latte on your way to the office doesn’t qualify.
• Entertainment costs — Sports tickets, concerts, or golf outings aren’t deductible, even if you bring a client. (The IRS eliminated most entertainment deductions after 2017.)

👉 Pro tip: Always keep documentation (who attended, what was discussed, and the receipt). A simple note on the receipt — “Lunch with Jane, discussed Q2 marketing plan” — can protect you if the IRS ever asks.

How to Track and Manage Business Expenses

Good bookkeeping isn’t optional — it’s the backbone of claiming deductions safely. Here’s how to keep things clean:

• Keep clean records: Save receipts, invoices, and mileage logs. Digital copies are fine, but they must be organized and accessible.
• Use tools: Bookkeeping software (QuickBooks, Xero), apps, or even spreadsheets if you’re just starting out.
• Separate finances: Always run your business through a dedicated bank account and (if possible) a business credit card.
• Be consistent: Record expenses weekly. Don’t wait until tax season — that’s how receipts go missing.
• Think ROI: A deduction isn’t “free money.” Spending $1 to save $0.25 in tax only makes sense if the purchase actually benefits your business.

Business Expenses for Non-US Entrepreneurs (Special Section)

If you’re a non-U.S. resident running a U.S. LLC, expense rules look different from a U.S. resident’s tax return.

• Only U.S.-connected income is taxable. Expenses tied directly to that U.S. income are deductible.
• Form 5472 applies. If your LLC has no U.S. trade or business but has reportable transactions with foreign owners, you must file Form 5472 + pro forma 1120 to disclose them. This isn’t a tax return — it’s an informational filing. And, STARTFLEET CAN HELP YOU WITH THIS.
• If you do have U.S. effectively connected income (ECI): You must file a full return (Form 1120 for corporations, or 1040NR if you’re treated as an individual). In that case, only expenses tied to U.S. income are deductible.

Common Mistakes to Avoid

Even savvy entrepreneurs slip up on expenses. Avoid these traps:

• Claiming personal costs (groceries, commuting) as business deductions.
• Forgetting to capitalize big purchases like computers or cars.
• Skipping receipts and documentation, making it impossible to defend deductions in an audit.
• Ignoring state-level rules like franchise taxes in Delaware or annual reports in Wyoming.

Final Thoughts

Business expenses aren’t just line items on a spreadsheet — they’re powerful tools to reduce your taxable income and keep more money in your business. The formula is simple: if a cost is both ordinary in your industry and necessary for your operations, it usually qualifies as a deduction.

But the details matter. Mix personal and business spending, forget to capitalize big assets, or skip record-keeping, and those “savings” can turn into IRS headaches.

For U.S. residents, deductible expenses directly lower taxable income on your return. For non-U.S. founders with a U.S. LLC, the rules depend on whether you have U.S. effectively connected income — in which case only U.S.-sourced expenses are deductible, and informational filings like Form 5472 may apply.

The good news? Once you build clean systems — separate accounts, consistent tracking, and a clear understanding of what counts — managing business expenses becomes second nature.

Business Expenses FAQs

What is a business expense?‍

A business expense is a cost that is both ordinary (common in your trade) and necessary (helpful and appropriate) for running your business. Examples include rent, wages, supplies, insurance, and marketing.

Can I write off my rent as a business expense?‍

Yes, if it’s for office or retail space. If you work from home, only the portion used exclusively and regularly for business qualifies (home office deduction).

What qualifies as a business meal expense?‍

Meals are deductible if they’re directly tied to business. Client meals and staff meals are generally 50% deductible; office parties are often 100% deductible. Solo meals don’t qualify.

Can you deduct life insurance premiums as a business expense?‍

No. Premiums for life insurance policies where you (or your business) are the beneficiary aren’t deductible. Health, dental, and vision insurance may be deductible if set up under your business (via Form 7206).

What can you write off as a business expense?‍

Common deductions include rent, utilities, employee pay, contractors, software, insurance, marketing, professional fees, travel, and depreciation of business assets.

Does home office furniture count as a business expense?

Yes — if it’s used primarily for business. A desk, office chair, or filing cabinet in your dedicated home office qualifies.

Are fuel costs deductible?

Only for business travel, like visiting a client. Commuting from home to your regular workplace doesn’t count. Many small businesses use the standard mileage rate instead of tracking actual fuel costs.

Are gifts deductible?

Yes, but the IRS caps it at $25 per recipient per year. Anything beyond that isn’t deductible.

Can I deduct charitable contributions?

Sometimes. If your business is structured as a corporation, you can deduct contributions (with limits). Sole proprietors usually deduct donations on their personal return, not as a business expense.

Are political donations deductible?

No. Political contributions and lobbying expenses are never deductible.

What about education and training?

Deductible if the training improves skills in your current trade or business. Not deductible if it qualifies you for a new career.

⚠️ Disclaimer: This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Business expense rules can vary depending on your specific situation. Always consult with a qualified tax professional or accountant before making decisions that could impact your taxes or compliance.