Eleanor Finch
As a sole proprietor, you can claim most business deductions on IRS Schedule C. This form is primarily used to record your deductions, so it's important to keep records of your business expenses, including proof of purchase, such as invoices or receipts. Most business expenses are tax-deductible, including money spent on supplies and services critical to your business. However, some expenses, like entertainment, are non-deductible. Workplace costs like rent, mortgage interest, utilities, maintenance, and insurance are generally deductible, but there are specific rules for home offices. Personal expenses are typically not deductible, but if an expense has both a business and personal component, you can claim the business portion.
| Characteristics | Values |
|---|---|
| Business travel | Deductible |
| Meals with clients or colleagues | Deductible |
| Meals with entertainment | May not be deductible |
| Business insurance | Deductible |
| Health insurance premiums | Deductible |
| Retirement plan costs | Deductible |
| Advertising | Deductible |
| Utilities | Deductible |
| Workplace costs like rent or mortgage interest | Deductible |
| Maintenance | Deductible |
| Personal expenses | Not deductible |
| Fines or penalties payable to the government | Not deductible |
| Excise tax for personal expense | Not deductible |
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Home office
If you're a sole proprietor and you work from home, you may be able to deduct some of your home office expenses from your tax returns. This is known as the 'home office deduction' and is available to both homeowners and renters.
To qualify for the home office deduction, you must meet certain criteria. Firstly, you must use part of your home exclusively and regularly as your principal place of business. This means that the space should be used solely for business purposes and not for any personal activities. Alternatively, you can use a separate structure on your property, such as a shed or a garage, exclusively and regularly for your business. In addition, you must determine that your home office is the principal place of your trade or business by considering where you perform your most important business activities and where you spend most of your business time.
There are two methods to calculate the home office deduction: the simplified option and the regular method. The simplified option uses a prescribed rate of $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet and $1,500. With this method, depreciation is treated as zero, and you cannot deduct home-related itemized deductions. The regular method calculates the deduction based on the percentage of your home occupied by your home office. You divide the office square footage by the total home's square footage, then multiply the allowable house expenses by this amount. Direct business expenses can be deducted in full using this method.
Some of the expenses that may be deductible as part of the home office deduction include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent. However, it's important to note that even if you qualify for the home office deduction, the deductible amount of these expenses may be limited. Additionally, you must be prepared with documentation in case you are audited by the tax authorities.
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Travel and meals
As a sole proprietor, you can deduct travel and meal expenses from your taxable income. However, these expenses must be "ordinary and necessary" for running your business.
Travel
If you use your vehicle for business purposes, you can deduct the entire cost of operating the vehicle. If you use it for both business and personal trips, you can only deduct the costs associated with business-related usage. The standard mileage rate set by the IRS each year can be used to calculate this deduction. For example, in 2025, the rate is $0.70 per mile. So, if your business trips totalled 1,500 miles, you could deduct $1,050 (0.70 x 1,500).
If you lease a car specifically for business use, you may deduct the standard mileage rate for the business miles driven or claim the actual expenses, which would include lease payments. However, you cannot deduct both lease costs and the standard mileage rate.
Meals
Meal expenses during business trips can be deducted in two ways: actual cost or the standard meal allowance. The actual cost method requires you to keep records of your spending. The standard meal allowance is the federal meals and incidental expense (M&IE) per diem rate, which varies by location and can be found on the GSA website.
It's important to note that meal expenses are generally subject to a 50% limitation, and you usually cannot deduct meal expenses unless you or your employee are present at the meal and the expense is not lavish or extravagant. Additionally, meals included with entertainment are typically not deductible.
To ensure compliance and accurate record-keeping, it is recommended to maintain documentation for each expense, including the amount, date, location, and business relationship of the person you dined with.
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Business insurance
As a sole proprietor, you can deduct many business-related expenses to lower your taxable income. Business insurance is one such expense that you can pay as a self-employed individual. According to the IRS, you can deduct the "ordinary and necessary" cost of insurance coverage as a business expense. This means that the insurance coverage is "ordinary" if other businesses in your industry typically have it.
There are several types of business insurance that you may be able to deduct, depending on your business's unique circumstances. These include:
- General liability insurance: This policy covers legal expenses when your business is sued over third-party bodily injuries on your property, property damage, and advertising injuries.
- Professional liability insurance: Also called errors and omissions insurance or malpractice insurance, this policy covers lawsuits over your business's alleged professional negligence, missed deadlines, and business errors.
- Commercial property insurance: This compensates you for the cost of repairing or replacing damaged or lost business property, including real estate, equipment, inventory, and other business property.
- Business interruption insurance: This is usually part of your property insurance policy and covers lost profits when your business is shut down due to fire, windstorms, or other covered events.
- Cyber insurance: Third-party cyber liability policies cover lawsuit expenses when you are responsible for someone else's data breach, while first-party cyber liability covers response costs when your business suffers a breach.
- Workers' compensation insurance: This insurance is required in most states and covers your employees' medical expenses and disability benefits after a workplace injury or illness.
- Commercial auto insurance: This policy covers liability and property damages associated with accidents in business-owned vehicles and is often required in most states. Please note that you cannot deduct commercial auto insurance and the standard mileage rate together.
- Unemployment insurance: You can usually deduct contributions to a state unemployment insurance fund if they are considered taxes under state law.
- Health insurance: This policy's premium can be deducted if it is for employees. However, there may be some complexities if you are a sole proprietor or independent contractor trying to deduct health insurance premiums. It is recommended to consult a tax professional for guidance.
To claim these deductions, you can list your insurance premium deductions on Schedule C under "Insurance" (Line 15). It is important to stay organized by keeping a simple spreadsheet or folder to log the total amount of your premium payments throughout the year. Additionally, tax laws frequently change, so it is advised to consult a tax professional before filing your taxes to ensure you are claiming the correct deductions and avoiding any red flags for audits.
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Vehicle expenses
As a sole proprietor, you can deduct vehicle expenses as long as they are \"ordinary and necessary\" for running your business. If you use your vehicle solely for business purposes, you can deduct the entire cost of operating the vehicle. However, if you use it for both business and personal trips, you can only deduct the costs associated with business-related usage.
The IRS provides guidance on calculating vehicle expense deductions. You can use either the standard mileage rate method or the actual expense method. The standard mileage rate for 2025 is $0.70 per mile, and you can deduct this amount for every business mile driven. This rate includes associated costs such as tolls and parking fees. The actual expense method involves calculating the percentage of your total driving for the year that was for business purposes and then multiplying this percentage by the total cost of operating your car for the year, including gas, oil changes, depreciation, repairs, insurance, and registration fees.
If you lease a car for business use, you have the option to deduct either the standard mileage rate for the business miles driven or the actual expenses, which would include lease payments. However, you cannot deduct both lease costs and the standard mileage rate. Additionally, any taxes on gasoline, diesel fuel, and other motor fuels used for your business are usually included as part of the cost of the fuel and can be deducted. If you purchase a vehicle for business use, you may be able to recover the cost as a section 179 deduction or through annual depreciation deductions under section 168.
It is important to maintain accurate records of your vehicle expenses, including receipts and invoices, to support your deductions. Keeping separate business and personal accounts can make it easier to track and calculate these expenses.
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Utilities
As a sole proprietor, you can deduct any ordinary and necessary expenses incurred while running your business. Utilities are considered a business expense and can be deducted from your gross income to reduce your taxable income. This includes expenses such as gas, oil, electricity, water, and cable, as long as they are used to earn income.
If you have a dedicated workplace outside of your home, the entire cost of utilities is usually tax-deductible. However, if you work from home, you can only deduct the portion of your utility expenses that are related to business use. This can be calculated based on the percentage of your home occupied by your home office or workspace. For example, you can divide the square footage of your office by the total square footage of your home and then multiply your utility expenses by this amount.
It is important to keep accurate records of your utility expenses and ensure that they are reasonable and necessary for your business. You may need to provide proof of purchase, such as invoices or receipts, to support your claims. Additionally, you should be prepared for potential IRS scrutiny, especially if your expenses exceed your income or you have not turned a profit in most of the recent years.
By claiming utility expenses as business expenses, sole proprietors can reduce their taxable income and lower their overall tax liability. This is a significant benefit of being a sole proprietor, allowing you to deduct legitimate business expenses from your personal taxes.
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Frequently asked questions
A business expense is any cost incurred as a result of operating a business, including expenses deemed necessary for the business to function.
Sole proprietors can claim most business deductions on IRS Schedule C. Workplace expenses like rent, mortgage interest, utilities, maintenance, and insurance are all deductible. Other deductible expenses include advertising, travel, meals with clients, and health insurance premiums.
Yes, personal expenses are generally not deductible. Entertainment expenses, such as meals with entertainment, are also not deductible. Additionally, charitable contributions cannot be deducted as a business expense, but they may be claimed on the owner's personal tax return.
You can use the standard mileage rate set by the IRS each year and multiply it by the number of business miles driven. Alternatively, you can calculate the percentage of total driving for the year that was for business and multiply it by the total cost of operating the vehicle for the year.
It is recommended to keep detailed records of all business transactions and expenses, including invoices and receipts. Running all business transactions through a dedicated business bank account can provide a clear record of amounts spent and received.
