How Do Business Tax Write Offs Work?

A business tax write-off, or deduction, is an expense that can be subtracted from a company’s revenue to lower its taxable income. This does not reduce the final tax bill on a dollar-for-dollar basis; instead, it lowers the amount of income subject to tax.

For example, imagine a business earns $100,000 in revenue and has $20,000 in deductible expenses. The business is not taxed on the full $100,000 but on the resulting $80,000 of profit. If the business is in a 21% tax bracket, this $20,000 deduction saves it $4,200 in taxes. This system is designed to tax a business on its net profit, acknowledging that it costs money to operate.

The Core Principle of Deductibility

For an expense to be eligible as a business tax write-off, the Internal Revenue Service (IRS) requires it to be both “ordinary” and “necessary.” These terms have specific meanings in a tax context and serve as the standard against which every potential deduction is measured.

An “ordinary” expense is one that is common and accepted in your trade or industry. The cost does not have to occur frequently, but it must be an expense that similar businesses would incur. For a graphic design firm, purchasing subscription-based design software is an ordinary expense.

A “necessary” expense is one that is helpful and appropriate for your business, though it does not have to be indispensable. If the cost can be reasonably expected to help generate income, it meets this standard. For example, the cost for a bakery to develop a website is considered necessary to attract customers.

A commercial photographer buying a new camera lens is incurring an ordinary and necessary expense. Conversely, that same photographer buying a speedboat for “location scouting” would have difficulty justifying it as necessary. The expense must be directly related to the business’s operations and be a sensible cost for that type of enterprise.

Common Categories of Business Write-Offs

Cost of Goods Sold (COGS)

For businesses that produce or purchase goods for resale, the cost of those goods is a significant deduction. This category, known as Cost of Goods Sold (COGS), includes direct costs like raw materials, storage, and direct labor. COGS is deducted in the year the inventory is sold, not purchased.

Salaries, Wages, and Employee Benefits

Compensation paid to employees is a fully deductible business expense, including salaries, wages, bonuses, and commissions. The costs of employee benefit programs are also deductible, such as contributions to retirement plans like 401(k)s, health insurance premiums, and tuition reimbursement up to $5,250 per employee annually.

Rent or Lease Payments

The cost of renting or leasing property for your business is a deductible expense. This applies to office spaces, retail storefronts, and manufacturing facilities. Payments for leased equipment or vehicles used for business are also deductible.

Utilities

Utility costs for your business premises are fully deductible. This includes expenses for electricity, gas, water, and telephone and internet services, as they are necessary for modern business operations.

Home Office Deduction

If you use part of your home exclusively and regularly for business, you may deduct a portion of your home-related expenses. The simplified method allows a standard deduction of $5 per square foot of office space, up to 300 square feet, for a maximum deduction of $1,500. The actual expense method involves deducting the business percentage of actual home costs, like mortgage interest, insurance, and utilities.

Business Use of Your Car

When using your personal vehicle for business, you can deduct the associated costs using one of two methods. The standard mileage rate allows a deduction of a set amount per business mile driven, which is 70 cents per mile for 2025. The actual expense method involves tracking all car-related costs and deducting the portion attributable to business use.

Business Travel

The costs of travel away from home for business purposes are deductible. This includes expenses for transportation, such as airfare, as well as lodging and 50% of the cost of meals.

Meals

You can deduct 50% of the cost of meals with clients, customers, or business associates, provided the meal has a clear business purpose. This 50% limit also applies to meals consumed while traveling for business.

Supplies

The cost of materials and supplies used in the course of business is fully deductible. This includes items like office supplies, cleaning supplies, and other materials consumed in day-to-day operations.

Insurance

Premiums for various types of business insurance are deductible expenses. This includes policies for general liability, professional liability, commercial property, and workers’ compensation.

Professional and Legal Fees

Fees paid to professionals for services rendered to your business are deductible. This includes payments to accountants, lawyers, and consultants. The cost of having a tax professional prepare your business tax return is a deductible expense.

Advertising and Marketing

Costs associated with promoting your business are fully deductible. This includes expenses for online advertising, print ads, website development and hosting, business cards, and other promotional materials.

Business Interest and Bank Fees

Interest paid on business loans or lines of credit is deductible, as are bank fees associated with your business accounts. There can be limitations on the amount of business interest you can deduct.

Taxes

Various federal, state, and local taxes incurred in operating your business are deductible. This includes the employer’s share of payroll taxes, unemployment taxes, and state and local income taxes.

Startup and Organizational Costs

The IRS allows you to deduct up to $5,000 in startup costs and another $5,000 in organizational costs in your first year of business. Each deduction is reduced by the amount that total costs in that category exceed $50,000. If total startup costs are $55,000 or more, the first-year deduction is eliminated.

Distinguishing Between Current Expenses and Capital Assets

A primary concept in business taxation is the difference between a current expense and a capital asset. This distinction determines when you can deduct the cost of a purchase, and the main difference lies in the useful life of the item.

Current expenses are costs for items that are consumed or provide a benefit for less than one year. These are day-to-day operational costs like office supplies, utility bills, and routine repairs. The full cost of a current expense is deducted from business income in the tax year it was incurred.

Capital assets are purchases with a useful life of more than one year, such as vehicles, machinery, and buildings. Since they provide long-term value, their cost is not deducted at once but is recovered over time through depreciation. Provisions like the Section 179 deduction allow businesses to expense the full cost of certain qualifying assets in the year they are placed in service, up to a specified limit. For 2024, the maximum deduction is $1,220,000. Bonus depreciation is another mechanism that allows for the immediate deduction of a percentage of an asset’s cost; for property placed in service in 2025, the rate is 40%.

Required Documentation and Recordkeeping

To claim any business deduction, you must be able to substantiate it with clear and contemporaneous records. The IRS requires documentation that proves the amount, time, place, and business purpose of an expense. Without proper records, even a legitimate deduction can be disallowed during an audit.

Separating business and personal finances is foundational to good recordkeeping. Use a dedicated business bank account and credit card for all business income and expenses to create a clean financial trail.

Retain supporting documents like receipts, paid invoices, and canceled checks for each expense. A valid receipt should show the payee, date, amount, and a description of the purchase. More detailed records are needed for certain expenses, such as a mileage log for vehicle costs or documentation of the business purpose and attendees for meals and travel.

The IRS requires you to keep tax-related records for specific periods.

• Records for employment taxes must be kept for at least four years.
• If you underreport gross income by more than 25%, the statute of limitations extends to six years.
• For property and other assets, records should be kept until the period of limitations expires for the year in which you dispose of the property.
• In most other cases, records should be kept for at least three years after filing a return.

Claiming Write-Offs on Your Tax Return

The final step is reporting deductions on the appropriate tax form, which depends on your business’s legal structure. Sole proprietors and single-member LLCs report business income and expenses on Schedule C (Form 1040), which is filed with their personal tax return. Schedule C has designated lines for common deduction categories.

Partnerships and multi-member LLCs file Form 1065, an informational return reporting the business’s income and deductions. The net income or loss is then passed through to the partners, who report their share on their personal tax returns.

C corporations file Form 1120 to report income and calculate their tax liability. S corporations file Form 1120-S, an informational return that passes profits and losses through to shareholders’ personal returns.