Business Tax Deductions and Recordkeeping

A business deduction is a cost of running your business that you subtract from your income before calculating tax. It lowers your tax bill, but it never gives back the full amount you spent. To count, a cost has to be a real business expense, and you need records that show it.

1. What is a business tax deduction?

A deduction works simply: less income on paper means less tax.

The IRS lets you deduct a cost if it's ordinary and necessary. Ordinary means common in your line of work, and necessary means helpful and appropriate for your business. It doesn't have to be something you couldn't live without.

Here's the catch: a deduction is not a refund. It lowers the income you pay tax on, so you save only a slice of what you spent.

That makes deductions great for things your business truly needs, but they're not a reason to go shopping. And swiping your business card for a personal purchase doesn't turn it into a business expense.

Deductions vs. credits

A tax credit is different, because it cuts your tax bill dollar for dollar. A $1,000 credit saves $1,000, while a $1,000 deduction saves much less. Most business costs are deductions, not credits.

2. What a deduction really saves

If you're a sole proprietor or one-owner LLC, a deduction saves you two kinds of tax:

Income tax, at your marginal rate. That's the rate on your next dollar of taxable income, not on all of it.
Self-employment tax, the 15.3% Social Security and Medicare tax on your business profit.

Example: Priya, a freelance writer, spends $1,000 on editing software. Her top federal bracket is 24%. The deduction saves her about $140 of self-employment tax and about $180 of federal income tax, roughly $320 in all. (The income tax part is a bit less than 24% of $1,000 because she also takes the qualified business income deduction, which lets many sole proprietors deduct up to 20% of their profit.)

So Priya saves about $320, but she's still out about $680. The software is worth it because she needs it, not for the tax break. If she lives in New York, she'd save a little more through state tax too.

3. Common deductions, including ones people miss

Here's what most small businesses can deduct:

Advertising: your website, ads, business cards.
Software and subscriptions you use for work.
Supplies like paper, ink and small tools.
Professional fees: your accountant, lawyer or bookkeeper.
Business insurance, like liability or professional (errors-and-omissions) coverage.
Contractors you pay to help with the work.
Bank and payment-processor fees, like card fees from Square or Stripe.
Business share of your phone and internet.
Education that improves the skills you use in your current business.
Travel away from home overnight for work: flights, hotels and 50% of meals.
Business meals with a client or prospect: usually 50% deductible. Keep the receipt and note who you met and why.

And some that new owners often miss:

Half of your self-employment tax. You take this on your personal return, not on Schedule C.
Health insurance premiums, if you're self-employed and not eligible for a plan through a job or your spouse's job.
Retirement contributions to a plan for the self-employed, like a SEP-IRA or solo 401(k).

What you can't deduct:

Your daily commute from home to a regular workplace.
Entertainment, like concert or game tickets, even with a client.
Everyday clothes, even if you wear them to work.
Owner draws, which is money you move from the business to yourself.
Fines and penalties.

4. Driving for business

You have two ways to deduct business driving:

Standard mileage rate: For 2026, it's 72.5 cents per business mile. It's simple, and most small businesses use it.
Actual expenses: You add up gas, insurance, repairs and depreciation (a deduction for the car's loss in value over time), then deduct the business share. This takes more records, but it can be worth more for a pricey car you drive a lot.

Either way, you need a mileage log. Write down each trip's date, where you went, why and how many miles, and do it at the time, in a notebook or an app. A log rebuilt months later is much weaker if the IRS asks.

Example: Jasmine, a mobile dog groomer, drives 6,000 miles to clients in 2026. She logs each trip in an app. Using the standard rate, her deduction is 6,000 × $0.725 = $4,350.

If Jasmine instead drove from home to a rented shop each day, that drive would be commuting, and it wouldn't count.

Your car loan payment isn't a deduction. If you use actual expenses, the business share of the loan interest counts, but the part that pays back the amount borrowed doesn't.

5. The home office deduction

You can deduct a home office if you meet two tests:

Regular and exclusive use. You use the space for work often, and for nothing else. A desk in the guest room doesn't count.
Main place of business. It's where you do most of your work, or where you run the business (billing, scheduling, records).

There are two narrow exceptions to the "nothing else" rule: running a licensed day care at home, and storing inventory or product samples.

Only self-employed people can take this deduction on their federal return. If you're an employee working from home, you can't, and a 2025 law made that ban permanent.

You can calculate it two ways:

Simplified method: $5 per square foot, up to 300 square feet, for a maximum of $1,500.
Regular method: You deduct the office's share of your home costs, like rent, utilities and insurance. It takes more records but can be worth more.

Either way, the deduction can't be more than your business profit.

Example: Dev, an interior designer, uses a 120-square-foot spare room only for work. His home is 1,200 square feet.

Simplified method: 120 × $5 = $600.
Regular method: His rent and utilities total $24,000 a year, and the room is 10% of his home (120 ÷ 1,200). So he could deduct $2,400, as long as he keeps the bills.

If the room doubled as a guest room, Dev would get $0.

6. Equipment and big purchases

Equipment you'll use for more than a year, like a computer or a machine, is an asset. Normally an asset's cost is spread out over several years through depreciation.

But two rules let most small businesses deduct the full cost in year one:

Bonus depreciation lets you write off the whole cost in the first year. A 2025 law, the One Big Beautiful Bill Act, made it 100% and permanent for qualifying property bought after January 19, 2025.
Section 179 is a separate election that lets you deduct up to $2,560,000 of equipment for 2026. That limit shrinks dollar for dollar once your purchases for the year pass $4,090,000, and most small businesses never come close.

There's also a simple rule for small purchases called the de minimis safe harbor. If you don't have audited financial statements, you can deduct items costing $2,500 or less per item or invoice right away. You make the election by attaching a short statement to each year's return, which your tax software or preparer can do.

The key date is when the item is placed in service. That means set up and ready to use, not just ordered or paid for.

Example: A bakery buys a $6,000 mixer and has it running by December 15, 2026. With 100% bonus depreciation, it can deduct all $6,000 for 2026. If the owner is a sole proprietor in the 22% bracket who takes the QBI deduction, that saves about $1,830 in federal income and self-employment tax. The bakery still spent $6,000 of cash, so it should buy the mixer because it needs one, not for the deduction.

If the mixer arrived December 28 but wasn't set up until January, the deduction would move to 2027.

7. When an expense is part personal

Many costs are part business, part personal. You can deduct only the business share. Your split should be reasonable, and you should be able to explain how you got it.

Example: Ana, a freelance designer, has three costs this year:

Software, $1,200, used only for client work. She deducts all $1,200.
Laptop, $1,500, used 60% for business. She can deduct the business share, $1,500 × 60% = $900, and can take it all this year under the rules in section 6.
Groceries, $800. These are personal, even though she works from home. $0.

How did she get 60%? She tracked her laptop use for a typical month and wrote it down. That note is her proof.

8. Keeping records the IRS will accept

A receipt shows you spent money. It doesn't prove the cost was for business. For each expense, keep:

The date, amount and who you paid
Proof of payment, like a card or bank statement
The business reason, written at the time ("lunch with client Jen Park to plan spring catalog")
The business share, if it was part personal

A simple monthly routine:

Download your business bank and card transactions.
Match each one to a receipt or invoice.
Sort expenses into categories (supplies, software, travel and so on).
Note the split for any mixed-use costs.
Reconcile, which means checking your records match your statements.

How long to keep records: The IRS says to keep tax records at least 3 years after you file. Keep them 6 years if you left out more than 25% of your income. Keep records on equipment and property until 3 years after the year you sell or get rid of it. If you have employees, keep payroll tax records at least 4 years.

What if you're audited without records? The IRS can deny the deduction, and you'd owe the tax you saved plus interest. You could also owe a 20% accuracy-related penalty on the extra tax. Good records turn an audit into a short conversation.

Common mistakes

Buying things just for the deduction. You save a slice, not the whole cost.
Claiming 100% business use on mixed items. A phone or car you also use personally needs a real split.
Forgetting the easy ones. Processor fees, half your SE tax and health premiums are often missed.
Deducting your commute. Home to a regular workplace is personal driving.
Claiming a home office that isn't used only for work. A shared room fails the test.
Rebuilding records at tax time. Notes written months later are harder to trust and to defend.

Frequently asked questions

Can I write off lunch?

Only if it's a business meal, such as with a client or prospect, and you note who and why. Then it's usually 50% deductible. Lunch alone at your desk doesn't count.

Can I deduct an expense I paid in cash?

Yes, if it's a real business cost and you keep a receipt that shows the date, amount and what you bought. Write the business reason on it.

Can I deduct my entire car payment?

No. You deduct either 72.5 cents per business mile (2026) or the business share of real costs. The loan payment itself doesn't count. If you use actual costs, the business share of the loan interest does.

Does New York follow these rules?

Mostly. New York starts with your federal business income, so most federal deductions carry over. But New York doesn't follow federal bonus depreciation for most property. It uses older depreciation rules instead, figured on Form IT-398, so your New York deduction for a big purchase is often spread over several years. Ask your preparer about large equipment purchases.

Does a receipt prove an expense is deductible?

No. A receipt proves you spent the money. The business reason and the rules decide whether you can deduct it.

The bottom line

A good deduction starts with a real business need and a record written at the time. Know the 2026 numbers: 72.5 cents a mile, up to $1,500 for a simplified home office, and full write-offs for most equipment. Remember that a deduction saves a slice of your cost, not all of it. A short monthly records routine will save you money and stress.

Authoritative sources

Convivial Wealth education guide · General education for U.S. readers, not personalized tax, legal or investment advice. Figures are for 2026 and are reviewed each year.

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