Most founders leave money on the table at tax time — not from aggressive strategies, but from ordinary deductions they never claimed because they didn't know they were deductible or couldn't document them. This guide covers the ones that actually matter for a service or product business.
The one rule that governs everything
A business deduction must be ordinary and necessary for your trade or business. "Ordinary" means common and accepted in your field; "necessary" means helpful and appropriate (not strictly indispensable). If an expense passes that test and you have a receipt, it's deductible.
Home office
The home office deduction applies if you use part of your home regularly and exclusively for business. "Exclusively" means a dedicated space — the kitchen table you also eat at doesn't count.
Two calculation methods:
- Simplified method — $5 per square foot, up to 300 sq ft, capped at $1,500. Zero records beyond square footage.
- Regular method — actual home expenses (rent/mortgage interest, utilities, insurance) × business percentage of the home.
For most founders the simplified method is the right trade-off. Document the space with a photo and a floor-plan note.
Vehicle
If you use your car for business (client meetings, supply runs, errands), two ways to deduct:
- Standard mileage rate — multiply business miles by the IRS per-mile rate. Simple, no depreciation tracking.
- Actual expenses — gas, insurance, maintenance, depreciation, prorated by business percentage.
Standard mileage is almost always easier, but it must be your *primary* method in the first year you use the car for business. Log every trip: date, miles, purpose. An app that tracks trips beats memory at audit time.
Software, tools & subscriptions
Everything you pay for to run the business is deductible:
- Accounting and invoicing software.
- Design, development, and marketing tools.
- Domain names, hosting, and email.
- Cloud storage and collaboration tools.
- Industry-specific software.
A common mistake is underclaiming the small recurring stuff — $20 a month here and there compounds into a real number over a year. Run a card statement at tax time and pull out everything business-related.
Equipment & office supplies
- Computers, phones, cameras, and tools — deductible via depreciation, or fully in the year purchased under Section 179 / bonus depreciation (subject to rules — get the current limits).
- Office supplies — paper, ink, packaging, shipping materials: fully deductible.
- Furniture — desks, chairs, monitors: capital items, depreciated or expensed under the same rules.
A 100%-business device is straightforward. If a device is mixed use, deduct only the business percentage and document it.
Professional services
- CPA and tax preparation fees.
- Attorney fees (business-related).
- Bookkeeping and payroll services.
- Consultants and contractors you pay for business work.
These are ordinary business expenses. The irony: founders who wouldn't dream of missing a $50 software deduction often fail to claim a $2,000 tax-prep bill.
Travel & meals
- Business travel — flights, hotels, ground transport for a business purpose. Fully deductible.
- Meals — generally 50% deductible, whether traveling or meeting a client locally. Keep the receipt and note the business purpose and who attended.
- Mileage to business destinations — deductible at the standard rate.
Marketing & advertising
Ads, website design, content creation, sponsorships, promotional materials — all deductible. If its purpose is generating customers, it's a marketing cost.
Health insurance & retirement
Two that pack a punch:
- Health insurance premiums — self-employed individuals can generally deduct premiums paid for themselves, their spouse, and dependents (above the line, before AGI).
- Retirement contributions — SEP IRA (up to a large percentage of net earnings) or solo 401(k) contributions. Every dollar you contribute is a dollar that isn't taxed this year — and you control the timing.
What's NOT deductible (the list that keeps you out of trouble)
- Commuting between home and your regular workplace.
- Personal clothing (unless it's a uniform with a business purpose).
- Entertainment — the IRS removed the entertainment deduction; only meals at 50% remain.
- Political contributions.
- Fines and penalties (including, unfortunately, tax penalties).
- Capital improvements to your home (depreciated, not deducted).
Documentation: the real tax strategy
A deduction you can't prove is a deduction you'll lose:
- Keep receipts — photo or scan everything over a small threshold.
- Log mileage at the time of the trip.
- Separate accounts — business card for business, personal for personal.
- Note the business purpose — a short memo on the receipt ("client dinner — Acme contract") turns an ambiguous expense into a documented one.
Common questions
Can I deduct my phone and internet? Yes, the business portion. If you have one line used 80% for business, deduct 80% — and document the usage.
Do I need a separate bank account to claim deductions? No, but it makes documentation dramatically easier and reduces audit risk. Clean books are a tax strategy.
What if my business is new and losing money? You can still deduct legitimate expenses against the loss, which may offset other income (subject to hobby-loss and passive-activity rules).
Is it worth paying someone to do this? For a founder with equipment, a home office, and mixed-use expenses, the found deductions + avoided mistakes usually exceed the cost of professional prep.
Don't optimize your way into an audit
The founders who get audited aren't the ones claiming normal deductions — they're the ones claiming aggressive ones without documentation. Claim what's real, document what you claim, and let a CPA handle the structure.