What is Business Expense?
A cost incurred in operating a freelance or business venture that is deductible from taxable income when it is ordinary and necessary.
Definition
A business expense is any cost that is ordinary (common and accepted in your profession) and necessary (helpful and appropriate for your business) that you incur while operating your freelance or small business. Business expenses are subtracted from your gross income when calculating your net profit for tax purposes — they reduce your taxable income and, consequently, your tax liability. The IRS requires that expenses be directly related to your business, not personal in nature, and that you keep records supporting the business purpose.
Common Freelance Business Expenses
Freelancers commonly deduct: home office expenses (the business portion of rent/mortgage, utilities, internet, and home insurance — using either the simplified method or actual expense method); equipment and computers (often deductible under Section 179 or depreciation); software and subscriptions (Adobe Creative Cloud, project management tools, invoicing software); professional services (accountant, bookkeeper, lawyer fees); marketing (website hosting, advertising, business cards); professional development (courses, conferences, industry memberships); business insurance (liability, health, equipment); and business travel (transportation, lodging, 50% of business meals).
Home Office Deduction
The home office deduction is one of the most valuable — and most audited — deductions for freelancers who work from home. To qualify, you must use a portion of your home exclusively and regularly for business. The deduction can be calculated using the simplified method ($5 per square foot, up to 300 sq ft = $1,500 max) or the regular method (actual expenses × business percentage). The regular method requires tracking actual costs; the simplified method is easier but may result in a smaller deduction.
Record-Keeping for Business Expenses
The IRS requires contemporaneous records — meaning you should document the business purpose, amount, and date of each expense at or near the time it occurs. A receipt or invoice is the primary supporting document. For meals and entertainment, you also need to document who was present and the business purpose discussed. Bank and credit card statements alone are not sufficient — they show what you paid but not why. Eonebill and most bookkeeping software automatically capture and categorize expenses, generating reports that simplify tax preparation.
Disallowed Expenses
Some expenses that freelancers might assume are deductible are actually not allowed, or only partially allowed, by the IRS. Personal, living, or family expenses with no business purpose are never deductible. Business expenses that are lavish or extravagant are not deductible. The cost of educating or training a client is not deductible. Political contributions and most lobbying expenses are not deductible. Fines and penalties paid to government agencies are not deductible. Entertainment expenses (tickets, golf, events) are generally not deductible after the 2017 TCJA changes, though 50% of business meals may still be.