What Expenses Can Self-Employed Individuals Deduct on Their Returns?

by | May 15, 2025 | Individual Taxes, Self-Employment & Business

Here’s what HIVE AI had to say about “What expenses can self-employed individuals deduct on their returns?”

Self-employed individuals can deduct a wide range of business expenses on their tax returns. These deductions help reduce taxable income and the overall tax burden. Here’s a comprehensive breakdown of deductible expenses for self-employed individuals:

Business Operating Expenses

Section 162(a) authorizes a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” A trade or business expense is considered ordinary if it is normal or customary within a particular trade, business, or industry, and necessary if it is appropriate and helpful for the development of the business. Dawson U.S. Tax Court Opinions: Hal Hollingsworth

These ordinary and necessary business expenses include:

Health Insurance and Medical Expenses

If you’re self-employed and have a net profit for the year, you may be eligible for the self-employed health insurance deduction. This is an adjustment to income, rather than an itemized deduction, for premiums you paid on a health insurance policy covering medical care, including a qualified long-term care insurance policy for yourself, your spouse, and dependents. IRS.gov Tax Topics

If you were self-employed and had a net profit for the year, you may be able to deduct, as an adjustment to income, amounts paid for health insurance (which includes medical, dental, and vision insurance and qualified long-term care insurance) on behalf of yourself, your spouse, your dependents, and your children who were under age 27 at the end of the tax year. For this purpose, you were self-employed if you were a general partner (or a limited partner receiving guaranteed payments) or you received wages from an S corporation in which you were more than a 2% shareholder. The insurance plan must be established under your trade or business and the deduction can’t be more than your earned income from that trade or business. IRS – Publication 502: Medical and Dental Expenses

In the case of a taxpayer who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents, and any child of the taxpayer who as of the end of the taxable year has not attained age 27. IRC § 162(l)

However, no deduction shall be allowed to the extent that the amount of such deduction exceeds the taxpayer’s earned income derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established. IRC § 162(l)

The expense of health insurance for the taxpayer is itself a deductible medical expense, but a taxpayer who is self-employed is permitted, to the extent of her earned income from her trade or business, to claim it as a separate deduction–as an above-the-line adjustment to income, as opposed to an itemized deduction. Any amount deducted for health insurance cannot also be taken into account in computing the medical expense deduction under section 213(a). Dawson U.S. Tax Court Opinions: Alka Sham

It’s important to note that sole proprietors may not deduct health insurance costs on Schedule C, Profit or Loss From Business. Under § 162(l)(4), the deduction shall not be taken into account in determining an individual’s net earnings from self-employment (within the meaning of § 1402(a)) for purposes of Chapter 2. Accordingly, the deduction under § 162(l) must be claimed as an adjustment to gross income on the face of Form 1040. CCA-0623001

Self-Employment Tax Deduction

In the case of an individual, in addition to the taxes described in subsection (a), there shall be allowed as a deduction for the taxable year an amount equal to one-half of the taxes imposed by section 1401 (other than the taxes imposed by section 1401(b)(2)) for such taxable year. For purposes of this chapter, the deduction allowed by paragraph (1) shall be treated as attributable to a trade or business carried on by the taxpayer which does not consist of the performance of services by the taxpayer as an employee. IRC § 164(f)

Tax-Related Expenses

Expenses paid or incurred by an individual in connection with the determination, collection, or refund of any tax, whether the taxing authority be Federal, State, or municipal, and whether the tax be income, estate, gift, property, or any other tax, are deductible. Thus, expenses paid or incurred by a taxpayer for tax counsel or expenses paid or incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining the extent of his tax liability or in contesting his tax liability are deductible. Tresuary Reg. 1.212-1

Meals and Travel Expenses

A self-employed individual who pays or incurs meal expenses for a calendar day or partial day of travel away from home may deduct an amount computed under section 4.03 of this revenue procedure in determining adjusted gross income under § 62(a)(1), subject to the appropriate limitation on meal expenses in § 274(n). A self-employed individual who does not pay or incur meal expenses for a calendar day or partial day of travel away from home may deduct an amount computed under section 4.05 of this revenue procedure in determining adjusted gross income under § 62(a)(1). Rev. Proc. 2019-48

Other Deductible Expenses

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income; for the management, conservation, or maintenance of property held for the production of income; or in connection with the determination, collection, or refund of any tax. IRC § 212

Total expenses or deductions for self-employed individuals can include components such as: repairs (and maintenance) expense; rents (or lease) expense; taxes and licenses expense; interest expense, including mortgage or other interest; depreciation expense; depletion expense; advertising expense; pension and profit-sharing plans (retirement plans) expense; employee benefit programs expense; utilities expense; supplies expense; contract labor expense; and management (and investment advisory) fees. Tresuary Reg. 301.6103(j)(1)-1

How to Report Deductions

Self-employed individuals include education expenses on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or Schedule F (Form 1040), Profit or Loss From Farming. IRS.gov Tax Topics

Most business expenses are reported on Schedule C (Form 1040), but some specific deductions are claimed as adjustments to income on Schedule 1 (Form 1040), such as:

Self-Employed Health Insurance and Self-Employed SEP, Simple, and Qualified Plans are reported as adjustments to income rather than on Schedule C. IRS IRM 4.10.16 Examination Operational Automation Database (EOAD)

Limitations and Requirements

To be deductible, expenses must be both ordinary and necessary for your business. Additionally, proper documentation and substantiation are required to support your deductions.

Section 162(a) authorizes a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. A trade or business expense is ordinary for purposes of section 162 if it is normal or customary within a particular trade, business, or industry and is necessary if it is appropriate and helpful for the development of the business. The evidence must be clear as to what the business actually entailed, so the Court can determine which expenses are ordinary and necessary. And even if you demonstrate that the alleged expenses were ordinary and necessary to your business, you must substantiate them. Dawson U.S. Tax Court Opinions: Hal Hollingsworth

Non-Deductible Expenses

Some expenses that are not deductible include:

Funeral or burial expenses; amounts paid for nonprescription medicines; amounts paid for toothpaste, toiletries, or cosmetics; amounts paid for a trip or program for the general improvement of your health; amounts paid for most cosmetic surgery; and amounts paid for nicotine gum and nicotine patches that don’t require a prescription. IRS.gov Tax Topics

In conclusion, self-employed individuals can deduct a wide range of business expenses that are ordinary and necessary for their trade or business. These deductions can significantly reduce taxable income, but proper documentation and adherence to IRS rules are essential to ensure these deductions are allowed if your return is examined.

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