What business expenses are tax deductible?

Tax-deductible business expenses are costs that businesses can subtract from their revenue when calculating taxable income. These deductions lower the amount of income subject to taxes, which reduces overall tax liability. To qualify, expenses must meet the IRS standard of being both “ordinary and necessary” for your business type.

An ordinary expense is common within your industry, while a necessary expense helps your business function or grow. Software subscriptions might qualify as a necessary expense for a tech company, as would specialized tools for a construction business. Ultimately, the connection between the expense and your business operations determines deductibility.

Business expenses fall into different categories based on how they're deducted. Some costs, like supplies or utilities, are deducted in full during the tax year you pay them. Capital expenses, such as equipment or property, spread their deductions across multiple years through depreciation or amortization. Other expenses face partial limits, including business meals or entertainment costs.

Documentation requirements vary by expense type, but maintaining records is important for all deductions. Receipts, invoices, bank statements, and mileage logs support your claims if your business is audited. Modern expense management solutions simplify this process by digitizing receipts and organizing expenses into IRS-compliant categories automatically.

Every business structure registered with the IRS can claim tax deductions, regardless of size or industry. From sole proprietors working from home to multinational corporations, the ability to deduct business expenses applies across the board. The key difference is how each business type reports these deductions.

Sole proprietorships and single-member LLCs file Schedule C with their personal tax returns to claim business deductions. On the other hand, corporations, both C-corps and S-corps, claim deductions on their business tax returns. Freelancers and independent contractors also qualify for business deductions. Whether you drive for a rideshare company, sell products online, or provide consulting services, you can deduct expenses related to generating that income.

The IRS doesn't restrict deductions based on business size or revenue. A startup with no profit can still claim deductions, potentially creating a net operating loss to carry forward. However, businesses must demonstrate profit intent. The IRS typically expects businesses to show profit in three of five years, or they risk being classified as hobbies with limited deduction options.

Deducting business expenses reduces your income subject to taxes, which puts money back into your business. A company earning $100,000 that claims $30,000 in deductions only pays taxes on $70,000. For business owners in higher tax brackets, these savings become even more significant.

Taken as a whole, tax savings from deductions strengthen your business's financial position. Instead of sending money to the IRS, you can reinvest in equipment, hire additional staff, or build cash reserves. Small businesses especially benefit from a lower tax liability, as every dollar saved through deductions can fund growth.

Properly documented deductions can also build credibility with lenders and banks, as well as potential partners. Lenders reviewing loan applications see organized expense records as evidence of sound financial management, and investors appreciate businesses that maximize tax efficiency while maintaining clean books. Even potential acquirers value companies with well-documented expense histories that clearly show deductible costs.

Missing eligible deductions is about the same as a voluntary overpayment of taxes. Without systematic business expense tracking, companies might overlook qualified costs like mileage, home office use, or small recurring subscriptions. Expense management software eliminates this problem by capturing every transaction, storing digital receipts, and categorizing costs according to IRS guidelines.

The IRS recognizes dozens of deductible expense categories that apply to most businesses. Understanding these categories can help you capture every legitimate deduction while maintaining proper documentation.

Occupancy expenses

Rent payments for office space, retail locations, or warehouses qualify as fully deductible business expenses. This includes base rent, common area maintenance fees, and property taxes passed through by landlords. If you operate from home, you can deduct the business portion using either the simplified method ($5 per square foot, up to 300 square feet) or actual expenses.

Utilities directly related to business operations are also fully deductible. This covers electricity, water, gas, internet service, and business phone lines. Cell phone bills require splitting personal and business use, making detailed logs important for maximizing deductions.

Office and technology expenses

Business supplies used within the tax year are immediately deductible. This includes paper, pens, printer ink, and other materials used in daily operations. Depending on the cost, larger purchases like computers or furniture may need depreciation over several years.

Software subscriptions and cloud-based services qualify as operating expenses when paid monthly or annually. This covers everything from accounting software to project management tools. One-time software purchases over $2,500 typically require capitalization and depreciation, though certain tax provisions often allow immediate deduction.

Depreciation and asset costs

Major purchases like equipment, vehicles, and property lose value over time through depreciation. The IRS provides standard depreciation schedules based on asset types to calculate this depreciation. Office equipment typically depreciates over five years, while commercial buildings spread over 39 years.

Startup and organizational costs

New businesses can deduct up to $5,000 of startup costs and $5,000 of organizational costs during their first tax year. However, these deductions begin to phase out dollar-for-dollar once total startup or organizational expenses exceed $50,000. Any expenses over these initial deductions must be amortized evenly over 180 months.

Startup costs typically include market research, advertising, employee training, and consulting fees incurred before the business opens. Organizational costs generally cover legal fees for forming the business entity, state filing fees, initial board meeting expenses, and related accounting costs.

Vehicle and travel expenses

Business travel expenses are fully deductible when you travel away from your tax home for business purposes. This includes airfare, hotels, ground transportation, and per diem while traveling. The IRS requires trips to be primarily for business, though some personal activities are allowed.

Vehicle expenses offer two deduction methods. You can choose between actual expenses or standard mileage reimbursement. The 2025 standard mileage rate is 70 cents per mile. Actual expenses include gas, maintenance, insurance, and depreciation, but require detailed recordkeeping. Commuting from home to a regular workplace doesn't qualify, but travel between work locations does.

Employee and labor costs

Salaries, wages, and bonuses are fully deductible when reasonable for the work performed. This includes payroll taxes, workers' compensation, and unemployment insurance. Year-end bonuses must be paid within 2.5 months after year-end to deduct in the current year for accrual-basis taxpayers.

Employee benefits like health insurance, retirement contributions, and education assistance programs are also deductible. Group health insurance premiums are fully deductible, and small businesses may qualify for healthcare tax credits.

Payments to independent contractors and freelancers are deductible when properly documented. You'll need proper tax documentation from contractors and must report payments exceeding $600 annually.

Insurance expenses

Business insurance premiums are deductible as ordinary expenses. This includes general liability, professional liability, commercial property, and business auto insurance. Key person life insurance is deductible only when the business isn't the beneficiary.

Retirement plan contributions

Employer contributions to qualified retirement plans are deductible business expenses. This includes 401(k) matches, SEP-IRA contributions, and defined benefit plan funding. Solo business owners can deduct contributions made as both employer and employee, maximizing retirement savings and tax benefits.

Meals and entertainment

Generally, business meals are 50% deductible when discussing business with clients, employees, or partners. The IRS eliminated entertainment deductions in 2018, but meals during entertainment events may still qualify if billed separately. Company parties and team-building meals can be 100% deductible when certain conditions are met.

Marketing

Marketing expenses are fully deductible in the year they’re incurred. This covers digital advertising, print ads, website development, trade show booths, and other promotional materials. Sponsorships qualify when they provide clear advertising benefits, and even branded company swag is deductible as advertising.

Professional and legal fees

Fees paid to attorneys, accountants, and consultants for business matters are tax deductible. This can include tax preparation, legal advice, and specialized consulting. Personal legal matters don't qualify, even if they affect the business. Fees for acquiring business assets must be capitalized rather than immediately deducted.

Financial and banking fees

Interest and fees on business loans and credit cards used for business purposes is fully deductible, and this applies to term loans, business lines of credit, and equipment financing. Personal credit card interest doesn't qualify, even for business purchases.

Business banking fees including monthly service charges, wire transfer fees, and overdraft charges are deductible when related to business accounts. Merchant processing fees and credit card transaction fees also qualify.

Licenses, permits and taxes

Business licenses, professional licenses, and regulatory permits are deductible expenses. State and local taxes paid by the business also qualify, including property taxes on business assets. Federal income taxes aren't deductible, but other federal taxes like excise taxes may be.

Bad debts

Businesses using accrual accounting can deduct bad debts when customers fail to pay invoices. The debt must be legitimate, previously included in income, and genuinely uncollectible. Cash-basis businesses can't deduct bad debts since they haven't recognized the income yet.

Cost of goods sold and inventory

Product-based businesses can deduct inventory costs when items sell, not when they’re purchased. This includes raw materials, labor, and overhead directly related to production. Proper inventory tracking becomes essential for accurate deductions and expense management tools help monitor these costs in real-time.

Shipping and postage

Postage, shipping supplies, and delivery charges for business purposes are fully deductible, including both incoming and outgoing shipments. This covers stamps, shipping labels, boxes, and courier services.

Dues and subscriptions

Professional association memberships and trade publication subscriptions are deductible when related to your business. This can also include industry conferences and chamber of commerce dues. Keep in mind, country club memberships generally aren't deductible unless you can prove a specific business use.

Employee training

Training that maintains or improves skills for your current business is a tax-deductible expense. This includes workshops, online courses, and industry certifications, but doesn’t include education that qualifies you for a new trade. Employee training costs are fully deductible as business expenses.

Charitable contributions

C-corporations can deduct charitable contributions that are up to 10% of their taxable income. Pass-through entities like S-corps and LLCs pass charitable deductions to owners' personal returns. Donations must go to qualified nonprofit organizations, and you'll need written acknowledgment for contributions over $250.

Repairs and maintenance

Routine repairs that keep property in working condition are immediately deductible, but improvements that add value or extend useful life must be capitalized and depreciated. Deductible expenses include fixing equipment, painting offices, and replacing broken parts.

Business gifts

Business gifts are deductible up to $25 per recipient per year, including holiday gifts to clients or referral sources. Gifts to employees don't face this limit but may be taxable compensation.

Proper documentation is your proof during an IRS audit and determines whether or not your deductions get rejected. For deductible expenses, the IRS requires companies to keep records that support both the amount and business purpose of each expense. Without adequate documentation, even legitimate business expenses can be disallowed, resulting in taxes, penalties, and interest.

For every business expense, maintain records showing five key elements. These include the amount spent, the date, where the purchase occurred, the business purpose, and who was involved. Itemized receipts form the foundation of expense documentation, but they're just the starting point.

Digital documentation has become the standard for modern companies. Scanning paper receipts immediately after purchases helps ensure each expense is properly documented. Spend management software streamlines this process by allowing you to photograph receipts with your phone, automatically extracting key information, and attaching the image to the corresponding transaction. This creates a searchable, organized database.

Certain expenses require additional documentation beyond basic receipts to be in compliance. Vehicle expenses need mileage logs showing dates, destinations, and business purposes for each trip. Meal expenses should include notes about who attended and what business topics were discussed. Travel expenses can benefit from keeping a daily log of business activities during the trip.

The IRS generally requires keeping tax records for three years from the filing date, but this extends to six years if you underreported income by more than 25%. Employment tax records need four years of retention, while records for assets should be kept until the depreciation period ends plus the applicable statute of limitations.

Expense tracking software can automate much of this documentation challenge. These platforms can generate receipts automatically or extract relevant data from physical receipts through OCR technology, and then categorize expenses according to IRS guidelines. Integration with accounting automation software means your documentation flows directly into tax preparation, reducing errors and saving significant time during tax season.

Tracking business expenses throughout the year can make tax preparation simple and straightforward. Consistent tracking can also reveal spending patterns and identify missed deductions that could save thousands in taxes.

Choose an accounting method that aligns with your business

Your accounting method determines how you deduct business expenses. This choice affects when you recognize income and expenses, ultimately impacting your tax liability and cash flow management.

Cash basis accounting recognizes expenses when you actually pay them. If you buy office supplies on December 15 but don't pay the credit card bill until January 10, you deduct the expense in January's tax year. This method aligns closely with your business bank account, making it intuitive for small business owners.

Accrual basis accounting recognizes expenses when you incur them, regardless of payment timing. Using the same example, you'd deduct those December 15 office supplies in December's tax year, even though payment happens in January. This method provides a more accurate picture of financial performance by matching revenues with related expenses in the same period.

The choice of cash vs. accrual accounting carries tax implications. Cash-basis businesses can time income and expenses by accelerating or delaying payments near year-end, such as prepaying January rent in December to create a current-year deduction. Accrual-basis businesses have less flexibility since the obligation date matters, not the payment date.

Separate business and personal expenses

Mixing personal and business expenses creates tracking issues and audit risks. Open a business bank account and business credit card to automatically separate transactions. If you must use personal funds for business purchases, reimburse yourself promptly and document the business purpose. This separation simplifies bookkeeping and strengthens your position if you’re audited.

Establish expense categories

Creating clear expense categories aligned with IRS classifications streamlines both expense reporting and tracking. Standard categories include office supplies, travel, utilities, and professional services, but your business might need specialized categories. Consistent categorization throughout the year prevents confusion during tax preparation and helps identify spending trends within each area.

Implement daily tracking

The most effective expense tracking happens immediately after purchases. Waiting weeks or months to record expenses leads to forgotten transactions and lost receipts. Enter expenses on a daily or weekly basis, and attach receipts as well as business purposes. This routine takes minutes when done regularly.

Leverage expense management tools

Expense management platforms offer more than basic receipt capture and can be strategic business tools that protect your tax deductions. Built-in expense policies help employees stay within guidelines, preventing non-deductible expenses before they happen. These platforms can also automatically require proper documentation for specific expense types, keeping your business compliant with IRS regulations throughout the year rather than scrambling during audits.

The real power comes from seamless integration with your existing financial systems. Direct integrations with ERPs and accounting software eliminate manual data entry while accelerating the month-end close process. This integration with platforms such as NetSuite and QuickBooks transforms expense tracking from a tedious compliance task into an opportunity for real-time financial insights and better business decisions.

Business credit cards can effectively track expenses for tax deductions. Perhaps most importantly, dedicated business credit cards eliminate the mingling of personal and business expenses that complicates bookkeeping and raises audit flags. When all business purchases flow through business cards, you avoid sorting through personal statements to identify deductible expenses.

Business credit cards can also integrate directly with expense management and accounting software, creating real-time expense tracking without manual data entry. Transactions import automatically and can be pre-categorized based on vendor type. This automation captures expenses you might otherwise forget while reducing the hours spent on monthly expense reconciliation.

Business rewards credit cards also unlock additional benefits. For instance, cash back earned on business purchases reduces your net expense cost, or travel rewards used for business trips create tax-free benefits. Annual fees for business cards qualify as deductible expenses, unlike personal card fees. Some cards offer rewards on common business categories like office supplies, telecommunications, and advertising, providing discounts on deductible expenses.

The payment terms of credit cards help with cash flow while preserving deductions. For accrual-basis taxpayers, charging December expenses maintains current-year deductions even if you pay the bill in January. Cash-basis businesses gain flexibility by timing when they pay credit card bills to optimize deductions between tax years.

Brex offers businesses an integrated financial operating platform where tax deductible business expenses can be tracked and controlled from the moment they occur. Rather than piecing together multiple tools and manual processes, companies gain a single solution that captures, categorizes, and documents every business expense automatically.

With the Brex corporate card, documentation can be automatically generated and matched to transactions, helping to automate expense reporting. Expense policies prevent out-of-policy spending before it happens, ensuring expenses remain deductible while reducing compliance risks. Brex AI categorizes expenses automatically, approving in-policy spending and flagging unusual expenses for manual review.

Further, Brex's bill pay software automates the accounts payable process and ensures that every transaction is properly documented and categorized. Custom approval flows ensure that each expense also gets the necessary oversight before payment, creating an audit trail that can satisfy IRS requirements. Whether paying vendors, contractors, or recurring bills, Brex automates invoice matching and ensures every expense flows through consistent documentation and approval processes.

Accounting automation built into Brex speeds up month-end close through a continuous close approach. Instead of scrambling at month-end or year-end to categorize expenses and match receipts, transactions are processed and coded in real time. Machine learning models trained on millions of transactions proactively suggest coding rules and mappings, reducing errors while ensuring expenses land in the correct tax categories.

This approach to expense management delivers measurable results. Average Brex customers save 312 hours each year on accounting and compliance, and AI accelerates month-end close by up to 3x. For Alchemy, a web3 development platform, switching to Brex brought similar improvements.

Before Brex, Alchemy used separate platforms for employee expense reimbursements, invoicing, and corporate cards, which caused the company to suffer from limited visibility into spend and long month-close processes. Alchemy consolidated these platforms into one solution with Brex, giving the business newfound clarity into expenses and cash flow.

“Brex is basically saving us 2 to 3 days on the financial close process monthly,” said Sean Soper, Head of Accounting and Financial Operations at Alchemy. “And that’s attributed to getting real-time insight into overarching spend. Once all the coding and the expenses are matched up, they go through the accounting module, which then goes through another level of review before we push it into our ERP software.”

Unifying spend management has done more than just accelerate month-close. “Overall, it gives us a competitive edge,” Sean added. “Having a unified approach to all of [our spend] has helped bring everything together, and it's really streamlined the process. By consolidating expenses, we can optimize our spending, make more informed decisions on the fly, and improve our bottom line.”

Sign up for Brex today to automate, simplify, and maximize your tax-deductible business expenses.