Which costs are deductible for running a small business?

Here’s what HIVE AI had to say about “Which costs are deductible for running a small business?”:
Deductible costs for running a small business

Core standard: ordinary and necessary

• You can deduct expenses that are ordinary (common and accepted in your trade) and necessary (helpful and appropriate) for carrying on your business. This is the baseline test under the Internal Revenue Code. 1

Day‑to‑day operating expenses

• Advertising and marketing, bank fees, licenses and regulatory fees, supplies and materials, utilities, repairs and maintenance to business property, and impairment‑related expenses are generally deductible when paid or incurred. 2
• Legal and professional fees that are directly related to operating your business (for example, bookkeeping, tax advice for Schedule C, or resolving business tax notices) are deductible. Fees to acquire business assets are capitalized into the asset’s basis. 2

Rent, office, and facility costs

• Rent for property you do not own and use in your business is deductible, but not if you receive equity or title. Rent paid to related parties must be reasonable to be deductible. 2
• If you rent your home and use part of it in your business, the business portion of rent may be deductible if you meet the business‑use‑of‑home rules. Repairs that benefit the entire home (for example, furnace repair) are deductible pro rata based on the business‑use percentage; security system monitoring can also be prorated. 3

Taxes you pay in the business

• Deduct state or local taxes directly attributable to your business (for example, state gross receipts taxes attributable to business). Employer payroll taxes you pay from your own funds (Social Security, Medicare, FUTA) are deductible business expenses. Do not deduct federal income tax. 2

Insurance premiums

• Deductible examples include liability and property coverage, vehicle insurance for business use (allocate if mixed use), life insurance covering employees where you are not a direct or indirect beneficiary, and business interruption insurance. Premiums for self‑insurance reserve funds are not deductible. 2

Vehicles and travel

• You may deduct the actual costs of business use (fuel, maintenance, insurance, depreciation/lease payments, etc.) or use the IRS standard mileage method, which substitutes a per‑mile rate for operating and fixed costs. Parking and tolls for business trips are separately deductible under either method. Keep contemporaneous mileage and expense records. 4

Startup and organizational costs

• Before you begin operations, certain startup and organizational costs are capital in nature, but you can elect to deduct up to $5,000 of startup costs and up to $5,000 of organizational costs, reduced dollar‑for‑dollar once total costs exceed $50,000; the remainder is amortized over 180 months starting when the business begins. 5
• The statute confirms this election and 180‑month amortization; regulations explain how to make the election. 6 7

Capital assets, repairs, and small‑dollar purchases

• Amounts paid to acquire or produce real or tangible personal property (for example, equipment, furniture, computers) are generally capitalized and recovered via depreciation, unless an exception applies.
• De minimis safe harbor: You may elect to currently deduct small‑dollar tangible property purchases if you expense them in your books—up to $5,000 per item or invoice with an applicable financial statement, or up to $2,500 without one. Report qualifying amounts as “other expenses” on Schedule C and follow the election procedures. 2
• Incidental repair costs that keep property in ordinarily efficient operating condition are generally deductible; improvements that better, restore, or adapt property to a new use must be capitalized. 8

Retirement plan contributions

• Employer contributions to SEP, SIMPLE, or qualified plans for yourself and employees are deductible; these plans provide tax‑favored retirement saving for small businesses. 2

What you cannot deduct

• Common nondeductible items include bribes and kickbacks, charitable contributions (unless deducted elsewhere if you itemize), entertainment expenses, political contributions, club dues, improvements (capitalize), penalties and fines for breaking the law, and personal, living, or family expenses. 2
• Personal items like a residential telephone line, lunches with co‑workers, wristwatches, and similar costs remain nondeductible. 9

Practical compliance tips

• Document expenses and keep receipts to show the business purpose and amount. Deduct only the business portion of mixed‑use costs.
• For related‑party rent, set pricing at arm’s length to avoid disallowance as “unreasonable.” 2
• For vehicle deductions, choose your method (actual vs. standard mileage) carefully and be consistent; maintain contemporaneous mileage logs. 4

If you list your main cost categories (rent, payroll, software, equipment, marketing, travel, etc.), I can map each item to its treatment (expense vs. capitalize), the right form line, and any elections you should consider this year.

Sources

1 – IRC § 162(a) 📄 Summarize
2 – IRS – Publication 334 Tax Guide for Small Business (For Individuals Who Use Schedule C) 📄 Summarize
3 – IRS – Publication 587 Business Use of Your Home (Including Use by Daycare Providers) 📄 Summarize
4 – Rev. Proc. 2099-38 📄 Summarize
5 – IRS – Publication 583 Starting a Business and Keeping Records 📄 Summarize
6 – IRC § 195(b) 📄 Summarize
7 – Treasury Regulation 1.195-1 📄 Summarize
8 – TAM 200247004 📄 Summarize
9 – IRS – Publication 529 Miscellaneous Deductions 📄 Summarize

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