What Counts as a Business Expense?

Many small business owners find themselves wondering "can I write this off?" Understanding what actually counts as a business expense is key for keeping your books accurate, as well as for making the most of your tax deductions and avoiding surprises during tax season.

Business Expense Basics

A business expense is any cost that is both ordinary and necessary for running your business. That's the IRS's standard definition. And while it may sound vague, it provides a helpful framework.

• Ordinary means it's common and accepted in your industry.

• Necessary means it's helpful and appropriate for your business operations.

For example:

• A freelance graphic designer buying design software? That's ordinary and necessary.

• A landscaping business paying for lawn maintenance equipment? Also ordinary and necessary.

Common Deductible Expenses

Before we dive any further, it's important to note that deductible expenses are determined by tax laws, meaning they can change over time. What qualifies as deductible one year might be limited or disallowed the next, depending on updates to IRS rules and legislation. Always stay current with guidance from your CPA or financial partner.

Here are some examples of typical business expenses that are usually deductible:

• Office rent or home office use (pending eligibility)

• Business-related travel and meals

• Professional services (legal, financial, consulting, IT, etc.)

• Marketing and advertising

• Software subscriptions (like QuickBooks Online!)

• Business insurance

• Supplies and small equipment

• Employee wages and contractor payments

Expenses That Don't Qualify (Or Aren't Fully Deductible)

Not all business-related spending qualifies for a full deduction. Here are some examples that often cause confusion for small business owners:

• Personal expenses: Mixing personal and business purchases is a no-go. Buying a new TV for your home and writing it off as a "client presentation tool" simply won't fly.

• Entertainment: Taking a client to dinner? That's partially deductible. Taking them to a concert? Not so much.

• Commuting Costs: Daily travel from home to your regular workplace usually isn't deductible.

• Owner draws: When you pay yourself directly from the business, it's not an expense, it's a distribution.

Categorizing Your Expenses Correctly

Misclassifying expenses can lead to inaccurate reports, missed deductions, or even IRS penalties. It's worth taking the time to:

• Track your expenses consistently

• Use clear categories in your accounting software

• Save receipts and documentation

It also helps create a clear audit trail, making it easier to defend deductions if ever questioned by the IRS. Proper categorization gives you more reliable financial insights throughout the year, helping you spot trends, control spending, and make strategic decisions with confidence.

Keeping your records updated throughout the year--not just during tax season--can save you time, stress, and potentially money. Waiting until the last minute to gather receipts and reclassify transactions often leads to errors, missed deductions, and unnecessary headaches. Consistent recordkeeping ensures your financial reports are always accurate and ready for decision-making or filing.

How Basswood Can Help

We support clients in keeping their records clean, categorized, and compliant. Our team reviews your expenses to ensure everything stays organized. Connect with us to learn more.