What Expenses Can I Deduct? A Guide for Sole Proprietors

If you’re a sole proprietor, one of the most common questions you’ll have at tax time is:

“What expenses can I deduct?”

So let’s start thinking about it early. Business deductions can reduce your taxable business profit, which may reduce the amount of tax you owe. But not every purchase you make while running your business automatically qualifies.

Here’s a practical way to think about deductible business expenses and some of the expenses sole proprietors commonly overlook.

The Basic Rule: Is It a Business Expense?

Generally, a business expense should be ordinary and necessary for your trade or business.

“Ordinary” means the expense is common or accepted in your type of business. “Necessary” means it is helpful and appropriate for operating your business—it doesn't necessarily have to be absolutely indispensable.

For example, a photographer might deduct editing software, camera equipment, website hosting, and advertising costs. A consultant might deduct professional software, business insurance, continuing education, and certain travel expenses.

The key is having a legitimate business purpose for the expense.

Common Expenses Sole Proprietors May Be Able to Deduct

Depending on your business and circumstances, deductible expenses may include:

Advertising and marketing. Website costs, online advertising, business cards, promotional materials, email marketing services, and other costs associated with promoting your business may qualify.

Office supplies and business expenses. Items such as printer supplies, postage, stationery, software subscriptions, and other supplies used for your business may be deductible.

Professional fees. Amounts paid to accountants, bookkeepers, attorneys, consultants, and other professionals for business-related services can generally be business expenses. Yep, that’s right even your bookkeeper is a deduction.

Business insurance. Premiums for qualifying insurance policies related to your business may be deductible.

Education and professional development. Courses, workshops, books, and certain training expenses may qualify when they maintain or improve skills needed in your existing business. Different rules can apply when education prepares you for a new trade or profession.

Equipment and technology. Computers, phones, tools, furniture, machinery, and other equipment purchased for your business may qualify for deductions. However, the timing of the deduction can depend on the type of property and applicable depreciation or expensing rules.

Business travel. Certain transportation, lodging, and other expenses incurred while traveling away from your tax home for business may be deductible. Personal portions of a trip generally aren't.

Business meals. Some business-related meals may be partially deductible when the applicable requirements are met. Keep records showing the amount, date, location, attendees when relevant, and business purpose.

What About Your Car?

If you use your personal vehicle for business, you may be able to deduct qualifying business vehicle expenses.

Depending on the applicable tax rules and your circumstances, you may calculate the deduction using a standard mileage method or actual vehicle expenses.

What matters most is separating business use from personal use.

Driving to meet a client or traveling between qualifying business locations may be business mileage. Your normal commute between your home and regular workplace generally isn't deductible simply because you're self-employed.

Keeping a mileage log throughout the year can make this much easier to document.

Can I Deduct My Home Office?

Possibly.

If you use part of your home regularly and exclusively for your business and meet the other requirements, you may qualify for the home office deduction.

For example, if you have a spare bedroom that you use exclusively as your business office, it may qualify. A dining room table that your family also uses for dinner generally won't satisfy the exclusive-use requirement.

There are different methods for calculating the home office deduction, so it's worth determining which method is appropriate for your situation.

What About My Cell Phone and Internet?

If you use your phone or internet for both business and personal purposes, you generally need to determine the business portion.

For example, if a service is used 60% for legitimate business purposes, you generally wouldn't treat 100% of the mixed-use expense as a business deduction.

The same concept applies to many expenses that have both personal and business use: document and deduct the appropriate business portion.

Don't Confuse a Deduction With a Tax Credit

A deduction generally reduces the income subject to tax. A tax credit generally reduces the tax itself.

So a $1,000 business deduction usually does not mean you'll receive $1,000 back.

Instead, the expense generally reduces the profit on which your taxes are calculated, assuming the expense is deductible.

Documentation Matters

A legitimate deduction can become difficult to support if you don't have adequate records.

Develop a system for keeping receipts, invoices, mileage records, bank and credit card statements, and notes explaining the business purpose of expenses when it isn't obvious.

Using a separate bank account and credit card for business activity can also make bookkeeping significantly easier—even though simply paying something from a business account doesn't automatically make it deductible.

Some Expenses Require Special Attention

Not every business-related cost is deducted in the same way.

Equipment and other long-term assets may be subject to depreciation or special expensing rules. Startup costs have their own rules. Meals have limitations. Vehicle and home-office deductions have specific requirements. Health insurance for a self-employed individual may also be handled differently from an ordinary Schedule C business expense.

And, of course, personal expenses generally aren't deductible just because you're a business owner.

When an expense falls into one of these categories, it's worth checking the specific tax rules before claiming it.

A Simple Question to Ask Before Claiming an Expense

Before categorizing a purchase as a business deduction, ask:

“Can I clearly explain how this expense relates to operating my business?”

Then ask a second question:

“Do I have the records to support it?”

If the answer to both is yes, you're in a much better position when it comes time to prepare your return.

The Bottom Line

Being a sole proprietor doesn't mean you should deduct everything you spend. But it also doesn't mean you should miss legitimate deductions because you aren't sure what counts.

Good bookkeeping throughout the year makes the process much easier. Track expenses when they happen, separate business and personal activity as much as possible, document the business purpose, and ask a tax professional about expenses that fall into a gray area.

The goal isn't simply to find as many deductions as possible.

It's to claim the deductions you're entitled to—and have the records to support them.

This article provides general educational information and is not intended as tax, legal, or accounting advice. Tax rules and individual circumstances vary. Consult a qualified tax professional regarding your specific situation.