Introduction

As a sole proprietor you report business income and expenses on Schedule C (Form 1040). Properly claiming deductible small business expenses reduces your taxable net income and can lower both income and self-employment taxes. The IRS requires that expenses be “ordinary and necessary” and properly documented (see IRS guidance: Deducting Business Expenses and Publication 535) (https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses).

This article explains common deductible expenses, documentation rules, how mixed-use items are handled, and practical tips I use with clients to reduce errors and audit risk. It also links to deeper how-to pages on home office deductions and self-employment taxes for sole proprietors.

How the rules work

  • “Ordinary”: common and accepted in your trade or business.
  • “Necessary”: helpful and appropriate for your business.

You claim most business expenses on Schedule C (Form 1040). Some costs are taken elsewhere (for example, half of self-employment tax is an adjustment to income). Keep receipts, mileage logs, contracts, invoices, and contemporaneous records to substantiate each deduction (IRS Pub. 535 and Pub. 587) (https://www.irs.gov/publications/p535) (https://www.irs.gov/publications/p587).

Primary deductible expense categories (with practical details)

1) Home office deduction

If you use part of your home exclusively and regularly as your principal place of business (or to meet clients), you may deduct a portion of home-related expenses. You can choose:

  • The simplified method (flat rate per square foot up to the IRS limit), or
  • The regular method (actual expenses pro-rated by the business-use percentage).

Exclusive-use and regular‑use tests are strict; occasional or shared use usually doesn’t qualify. For step-by-step qualification and record examples, see our detailed guide on the home office deduction and IRS Publication 587 (https://www.irs.gov/publications/p587).

2) Business supplies and equipment

  • Supplies (paper, postage, software subscriptions) are typically deductible in the year purchased.
  • Equipment and larger assets (computers, furniture) are depreciated or may be expensed under Section 179 or bonus depreciation rules (see IRS Pub. 946). Choose immediate expensing only after checking the limits and whether the asset qualifies.

3) Vehicle use

You must choose between the standard mileage rate (IRS publishes the annual rate) or actual vehicle costs (gas, oil, repairs, insurance, depreciation) multiplied by business use percentage. Keep a contemporaneous mileage log showing date, purpose, miles driven, and odometer readings. If you switch methods, special rules apply—document the year and method change.

4) Travel, meals, and entertainment

  • Travel expenses for business trips (airfare, lodging, taxis, baggage) are deductible when primarily for business.
  • Business meals are generally deductible up to 50% when business-related and properly documented (date, place, business purpose, attendees). Special rules for meals provided by employers or certain restaurant meal exceptions applied in specific years — check current IRS guidance before filing.

5) Contract labor and employee wages

Payments to independent contractors are deductible as business expenses. If you pay a contractor $600 or more in a year, you generally must file Form 1099-NEC. Wages and payroll taxes for employees are deductible business expenses but require proper payroll reporting.

6) Marketing, advertising, and professional services

Advertising, website costs, online ads, and fees paid to accountants, attorneys, and consultants are ordinary and necessary expenses and deductible in the year paid.

7) Insurance, licenses, and fees

Business insurance premiums, licensing fees, and trade-specific regulatory costs are deductible when related to business operations.

8) Interest and business taxes

Interest on business loans is deductible. State and local business taxes and employer payroll taxes paid by the business are deductible (federal income tax is not deductible).

9) Health insurance and retirement contributions

Self-employed health insurance premiums may be deductible above the line on Form 1040 if you meet eligibility rules. Retirement plan contributions (SEP-IRA, Solo 401(k)) are deductible and reduce taxable income while allowing tax‑deferred retirement savings.

10) Startup and organizational costs

You may elect to deduct a portion of qualifying startup costs in the first year up to the IRS threshold; remaining costs are typically amortized. Check Publication 535 for the current treatment and limits.

Handling mixed-use and allocation

When a purchase serves both personal and business purposes (cell phone, internet, car), allocate the business portion based on use. For example, if 60% of your internet use is business-related, you can deduct 60% of the cost. Document how you calculated the business-use percentage (logs, usage records, or a reasonable allocation method).

Common forms and where deductions appear

  • Schedule C (Form 1040): primary reporting for sole proprietors’ business income and expenses.
  • Schedule SE (Form 1040): used to calculate self-employment tax (you may deduct half of this tax as an adjustment on Form 1040).
  • Form 4562: depreciation and Section 179.
  • Form 8829: if you use the regular method for the home office deduction (business use of home).

For details on calculating and reporting self-employment taxes see our guide: How to Calculate and Report Self-Employment Taxes.

Recordkeeping best practices (practical, audit-ready)

  • Keep original receipts and digital backups. Scanned and timestamped copies are acceptable under IRS rules if they’re legible and complete.
  • Maintain an ongoing mileage log with date, business purpose, start/end odometer, and miles driven.
  • Save invoices, bank statements, canceled checks, and contracts showing the business purpose.
  • Reconcile business bank and credit-card statements monthly.
  • Use accounting software (QuickBooks, Xero) or clear spreadsheets to categorize expenses. In my practice, clients who reconcile monthly and categorize expenses correctly reduce bookkeeping errors and save tax preparation time.

Common mistakes that trigger audits or lost deductions

  • Claiming a home office without meeting the exclusive-use test.
  • Poor or missing mileage logs for vehicle deductions.
  • Deducting personal expenses as business costs without proper allocation.
  • Failing to issue required 1099-NEC forms to contractors.
  • Overstating startup cost deductions in the first year.

Strategies to maximize deductions legally

  • Review purchases at year-end to accelerate deductible expenses into the current tax year when appropriate.
  • Use retirement plans to lower taxable income while saving for retirement — SEP-IRAs and Solo 401(k)s have high contribution limits for sole proprietors.
  • Use the home office simplified method if you want an easy, lower‑risk approach; use the regular method when actual expenses produce a larger deduction and you can substantiate them.

Real client example (anonymized)

A freelance consultant I worked with tracked software subscriptions, client travel, and a dedicated home office. By switching to the regular home office method and capitalizing then depreciating a high-end computer under Section 179 for partial expensing, they increased their deductible expenses by several thousand dollars and lowered quarterly estimated tax underpayments going forward. The key was contemporaneous records and a year-end review.

When to consult a tax professional

Tax rules change and individual situations vary. Consult a CPA or enrolled agent when:

  • You have significant startup costs or large asset purchases (Section 179/bonus depreciation).
  • You’re unsure about the home office exclusive-use test or mixed‑use allocations.
  • Your business income approaches levels where different entity structures (LLC, S corporation) might save self-employment taxes.

Authoritative sources and where to read more

Internal resources

Professional disclaimer

This article is educational and not personalized tax advice. Rules, rates, and dollar limits change; always confirm specifics with the latest IRS publications or a qualified tax professional before taking action.

Bottom line

As a sole proprietor you have many legitimate deductions that can materially reduce taxable income. The two keys are: (1) confirm each expense meets the “ordinary and necessary” test, and (2) maintain contemporaneous, organized records. Properly done, deductions improve cash flow, lower tax bills, and free resources to grow your business.