The IRS uses a straightforward test. An expense must be “ordinary and necessary” for your trade or business. Ordinary means it’s common in your industry. Necessary means it’s helpful and appropriate for running the business. If an expense meets both criteria, it’s generally deductible. That principle covers more than most small business owners realize.

Operating costs are the most obvious category. Rent, utilities, internet, phone service, insurance premiums, office supplies, and software subscriptions all qualify. These are the costs of keeping your business running day to day, and they’re fully deductible in the year you pay them.

Labor costs are typically the largest deduction for businesses with employees. Wages, salaries, employer payroll taxes, workers’ comp insurance, health insurance contributions, and retirement plan contributions are all deductible. Payments to independent contractors count too, as long as you file the appropriate 1099 forms at year end.

Professional services are fully deductible. Your accountant, attorney, bookkeeper, and any consultant you hire. The fees you pay for expert help are business expenses, plain and simple.

Vehicle and travel expenses catch a lot of business owners off guard because of how quickly they add up. Business mileage, gas, tolls, parking, flights, hotels, and 50% of business meals while traveling are all deductible. If you use a vehicle for both personal and business driving, you need to track mileage or maintain records showing the business percentage. A contractor driving 25,000 business miles a year could be looking at over $17,000 in deductions at the current IRS mileage rate. Failing to log those miles means leaving that money on the table.

Equipment and tools are deductible, though the timing depends on the cost. Smaller items can be expensed immediately. Larger purchases like machinery, vehicles, or computers may qualify for Section 179 or bonus depreciation, which lets you write off the full cost in the year of purchase instead of spreading it across several years. Your tax strategy should account for these decisions because the timing of equipment purchases can meaningfully affect your tax bill.

Marketing and advertising expenses are fully deductible. Your website, social media ads, business cards, signage, vehicle wraps, sponsorships, and promotional materials all count. Anything you spend to attract customers is a business expense.

Home office deductions apply if you use part of your home regularly and exclusively for business. You can deduct a proportional share of your rent or mortgage interest, utilities, insurance, and repairs. The IRS also offers a simplified method at $5 per square foot up to 300 square feet.

Education and training are deductible when they maintain or improve skills in your current business. An electrician taking advanced certification courses or a dental practice sending staff to a continuing education seminar can deduct those costs.

Interest on business loans, business credit cards, and lines of credit is deductible. So are licenses, permits, business registrations, and professional membership dues.

The expenses that create problems are the ones that blur the line between personal and business. A lunch with a client where you discussed a project is 50% deductible. Dinner with your family is not, even if you mentioned work at the table. A laptop used exclusively for business is fully deductible. One shared with the kids gets complicated.

The biggest mistake isn’t claiming something you shouldn’t. It’s failing to claim things you’re entitled to because you didn’t track them. Small purchases, mileage, subscriptions, and professional development costs add up over twelve months. Without a system for recording them, they get forgotten by the time tax season arrives.

Use a dedicated business bank account and credit card. Save receipts or scan them digitally. Categorize expenses monthly instead of scrambling at year end trying to remember what a $312 charge was for. Having that foundation of solid financial strategy throughout the year is what turns deductions you’re technically entitled to into deductions you actually claim.