Key takeaways
- The IRS test is “ordinary and necessary.” Necessary doesn’t mean indispensable, just helpful and appropriate. See IRS Publication 334.
- Mixed personal and business costs, like a phone or home internet, are deductible only for the business-use share.
- Some business expenses have special limits: most meals are 50% deductible, gifts are capped at $25 per person per year and entertainment is generally not deductible.
- Every expense needs a record: what it was, when, how much and why it was for the business.
What is a business expense?
If you freelance, run a side business or own a small company, almost every week brings a question: is this a business expense? Rent for a studio, yes. A new laptop, probably. A gym membership because you “need energy for work,” no. Most cases are clear. The interesting ones are in the middle, and that’s where the IRS test comes in.
Snap and categorize every business expense on the go with the Manage Receipt app.
The IRS ordinary and necessary test
Common and accepted in your trade. A photographer buying lenses is ordinary.
Helpful and appropriate for your business. It doesn’t have to be essential.
Primarily for the business. Personal benefit can disqualify it or require a split.
On top of the test, the expense can’t be a capital cost you must depreciate instead, can’t be specifically disallowed (like fines), and has to be supported by records.
Common categories
Most business expenses fall into familiar groups: advertising, vehicle and mileage, contract labor, insurance, legal and professional fees, office expenses and supplies, rent, repairs, software, travel, meals, utilities and wages. The expense category page maps each one to its Schedule C line.
Grey-area examples: yes or no?
Here’s the ordinary-and-necessary test applied to ten items people ask about most:
| Item | Business expense? | Why |
|---|---|---|
| Mobile phone | Business share | Deduct the business-use percentage of the bill; a separate business line is fully deductible. |
| Home internet | Business share | Only the portion used for work, based on a reasonable estimate. |
| Everyday work clothes | No | Clothes suitable for everyday wear are personal, even if you only wear them to work. |
| Uniforms and safety gear | Yes | Required for work and not suitable for everyday wear. |
| Gym membership | No | Personal health benefit, even if fitness helps your work. |
| Client lunch | 50% | Business meals with a clear purpose are generally 50% deductible. |
| Concert tickets for a client | No | Entertainment is generally not deductible under current federal law. |
| Laptop used for work | Yes | Usually deductible in full in the first year or depreciated; split if used personally. |
| Commute to your office | No | Commuting is personal; trips from the office to clients are business. |
| Parking ticket on a client visit | No | Fines and penalties paid to a government aren’t deductible. |
Mixed personal-business expenses
Many costs serve both your life and your business. The rule is to deduct only the business share, and to be able to show how you worked it out.
- Phone: review a typical month of calls and data; if 60% is work, deduct 60%.
- Car: business miles ÷ total miles, or use the standard mileage rate for business miles only.
- Home office: only if the space is used regularly and exclusively for business.
- Trips that mix business and vacation: travel costs are deductible if the trip is primarily for business; personal days aren’t.
Keep the calculation in writing. An estimate you can explain is much stronger than a round number you can’t.
Records you need
- A receipt or invoice showing the vendor, date, items and amount
- Proof of payment, such as a card or bank statement
- The business purpose, especially for meals, travel and gifts
- Your business-use percentage for mixed costs, and how you calculated it
- Mileage logs for vehicle use
For travel, gifts and vehicles, the IRS has stricter substantiation rules. Keep records for at least three years after you file.
Business expense vs capital expense
| Business (operating) expense | Capital expense | |
|---|---|---|
| What it is | Day-to-day running costs | Assets that last more than a year |
| Examples | Supplies, rent, software subscriptions, ads | Computers, vehicles, machinery, building improvements |
| Tax treatment | Deducted in the year paid | Depreciated, or expensed under Section 179 or the de minimis rule |
Tag business vs personal at the source
When you scan a receipt in Manage Receipt, mark it business or personal and pick a category right there. Mixed items can be split, and the business purpose is saved with the receipt. At tax time, the AI tax report shows only the business expenses, already grouped and backed by receipts.
Explore AI Tax ReportsFrequently asked questions
Is my phone a business expense?
Partly. If you use one phone for work and personal life, you can deduct the business-use percentage of the monthly bill, based on a reasonable estimate you can explain. A separate line used only for business is fully deductible. Keep the bills and your calculation.
Are work clothes deductible?
Only if they’re required for your work and not suitable for everyday wear, such as uniforms, branded workwear or protective gear. Suits, business casual and other clothes you could wear outside work aren’t deductible, even if you only wear them for business.
What expenses cannot be deducted?
Personal, living and family costs aren’t deductible. Neither are fines and penalties paid to a government, political contributions, most entertainment, commuting, and gym memberships. Capital purchases must be depreciated or expensed under special rules rather than deducted like everyday costs.
Can I deduct expenses before my business starts?
Start-up costs, such as market research and pre-opening advertising, can be deducted up to $5,000 in the year the business begins, reduced if total start-up costs exceed $50,000. The rest is amortized over 180 months. Costs only count once you actually start the business.