Can I Take the Standard Deduction and Business Expenses?

Self-employed individuals and those with side businesses often wonder if they can claim both business expenses and the standard deduction. It is generally possible to claim both, as these are distinct types of deductions within the tax system.

What Qualifies as a Business Expense

A business expense must be “ordinary and necessary” for the operation of a trade or business. An ordinary expense is common and accepted in a specific industry, while a necessary expense is helpful and appropriate for the business, though not necessarily indispensable.

Common examples of deductible business expenses include office supplies, advertising costs, and professional development. Business travel expenses, such as airfare, hotel stays, and meals during business trips, can also qualify. Additionally, costs associated with a home office, like a portion of rent, utilities, or insurance, may be deductible if the space is used regularly and exclusively for business.

Individuals operating a business for tax purposes include sole proprietors, independent contractors, and freelancers. These taxpayers receive income from their services or sales and are responsible for reporting both income and associated expenses. Deducting these expenses accurately reflects the net profit or loss from the business activity.

Understanding the Standard Deduction

The standard deduction is a fixed dollar amount that taxpayers can subtract from their Adjusted Gross Income (AGI) if they choose not to itemize their deductions. This deduction simplifies tax filing for many by eliminating the need to track numerous individual expenses. It serves to reduce the amount of income subject to tax, thereby lowering a taxpayer’s overall tax liability.

The standard deduction amount varies by filing status and is adjusted annually for inflation. For the 2024 tax year, it is $14,600 for single filers and married individuals filing separately, $21,900 for heads of household, and $29,200 for those married filing jointly and qualifying surviving spouses. Taxpayers age 65 or older or who are blind may qualify for an additional standard deduction, which for 2024 can be $1,550 or $1,950 per qualifying person, depending on filing status.

The standard deduction is an alternative to itemized deductions, which involve listing specific deductible expenses like mortgage interest, state and local taxes, or charitable contributions. Taxpayers choose the method that results in the larger deduction to minimize their taxable income.

How Business Expenses and the Standard Deduction Interact

Business expenses and the standard deduction operate at different stages of income tax calculation. Business expenses are “above-the-line” deductions, subtracted from gross income to arrive at Adjusted Gross Income (AGI).

For instance, a self-employed individual’s gross business income is first reduced by their ordinary and necessary business expenses. The resulting net business profit or loss then contributes to their overall gross income. Once all sources of income are accounted for and reduced by other above-the-line deductions, the AGI is determined.

After AGI is calculated, taxpayers apply either the standard deduction or itemized deductions. These are “below-the-line” deductions, reducing AGI to arrive at final taxable income. Business expenses reduce income at an earlier stage, and the standard deduction further reduces income later. These two types of deductions do not cancel each other out; rather, they work in conjunction to lower a taxpayer’s overall taxable income. The ability to claim both allows self-employed individuals to account for their business costs while also benefiting from the fixed tax reduction provided by the standard deduction.

Reporting Business Income and Expenses

Self-employed individuals primarily report their business income and expenses on Schedule C, Profit or Loss from Business (Sole Proprietorship). This form is used to calculate the net profit or loss from a business activity. It details various categories of expenses, allowing taxpayers to list their ordinary and necessary costs.

The net profit or loss from Schedule C flows directly to Form 1040, the U.S. Individual Income Tax Return. This amount contributes to the calculation of total income and Adjusted Gross Income (AGI). Accurate record-keeping is important for completing Schedule C, as it supports all reported income and expenses.

After AGI is established on Form 1040, the standard deduction is claimed directly on this main tax form. Taxpayers indicate their choice to take the standard deduction, and the applicable amount for their filing status reduces their AGI to arrive at taxable income. This allows for the application of the standard deduction after all business-related adjustments have been made.