Most ordinary and necessary business expenses are deductible.
Detailed Answer
Business expenses are deductible if they are both ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate for your business). Deductible expenses include rent, utilities, office supplies, travel, and employee wages. However, personal expenses, capital expenses, and expenses related to illegal activities are not deductible. For example, a freelancer can deduct the cost of a new laptop used for work, but not the cost of a personal vacation.
Where to Put It on the Tax Form
Schedule C (Form 1040) for sole proprietors, or relevant business tax forms for other entities.
Real World Example
A graphic designer who operates as a sole proprietor can deduct the cost of design software subscriptions and a portion of their home internet bill used for business purposes.
Calculation Required
A calculation is required for this deduction.
You must calculate the percentage of expenses used for business versus personal use. For example, if a phone bill is $100 and 60% of the use is for business, then $60 is deductible.
Audit Risk & Documentation Tips
Keep detailed records and receipts for all business expenses. Maintain a log for mixed-use items, like a vehicle or phone, to substantiate the business portion. Be cautious with large deductions that are disproportionate to your income, as they may trigger an audit.
IRS Reference
IRS Publication 535, Business Expenses
Relevant Industries
FreelancersSmall BusinessConsultantsRetailersService Industry
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Disclaimer: This is for informational purposes only and should not be construed as tax or legal advice. Always consult your tax advisor.
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