If you work for yourself in the US as a sole proprietor, your business expenses end up on Schedule C (Form 1040), Profit or Loss From Business. Good tracking means that at tax time each cost is already sorted into a Schedule C category and has a record behind it. This guide covers federal (IRS) rules only; state rules vary.
The test every expense has to pass
In Publication 334, Tax Guide for Small Business (chapter 8): “To be deductible, a business expense must be both ordinary and necessary.” It goes on: “An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.”
The same chapter covers costs that are partly personal: “separate the personal part from the business part. The personal part is generally not deductible.” So for a car or a phone line you use both ways, the business share is what goes in your records, and you need some basis for that share.
Older advice often cites Publication 535, Business Expenses. The IRS has discontinued Publication 535 (last revised for 2022) and maps many of its topics to Publication 334.
Two rules that catch people out:
- Commuting is personal. Publication 463 says you can’t deduct the cost of getting between your home and your main or regular place of work, “no matter how far your home is from your regular place of work.” Parking at your own place of business counts as commuting; parking when you visit a client does not.
- Entertainment is out, meals are partly in. Publication 463 says you “can no longer take a deduction for any expense related to activities generally considered entertainment, amusement, or recreation,” while 50% of business meals can still be deducted if you are present and the meal isn’t lavish or extravagant.
Keep business money in its own account
Publication 583, Starting a Business and Keeping Records, is direct about this: “One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account.” It adds: “Use the business account for business purposes only.”
In practice, a separate account and a card tied to it do most of the sorting for you. When you pay yourself, move money from the business account to your personal one. For cash payments, Publication 583 says to keep the receipt, and if you can’t get one, “make an adequate explanation in your records at the time of payment.”
Where common expenses go on Schedule C
Part II of Schedule C lists expense categories by line. The table matches everyday costs to the lines on the 2025 Schedule C form and in the 2025 Instructions for Schedule C, with the conditions the instructions attach. Line numbers are from the 2025 form. Use the line names as your categories and year-end totals are a matter of adding up.
| Everyday expense | Schedule C line | What the instructions say |
|---|---|---|
| Paid ads for your business | 8, Advertising | Category named on the form |
| Gas, repairs, insurance for a car used for business | 9, Car and truck expenses | Business portion only. Or use the standard mileage rate (70 cents a mile for 2025) plus parking fees and tolls, if you meet its conditions |
| Commissions and fees you pay | 10, Commissions and fees | Don’t include fees deducted elsewhere or capitalized |
| Freelancers and independent contractors you pay | 11, Contract labor | Not employee wages (those go on line 26) |
| Equipment that lasts well beyond a year | 13, Depreciation and section 179, or Part V | Depreciation recovers the cost of property useful substantially beyond the tax year; see the de minimis safe harbor below |
| Business insurance, such as liability | 15, Insurance (other than health) | Your own health insurance doesn’t go here; the line 14 instructions say you may be able to deduct it on Schedule 1 (Form 1040), line 17 |
| Interest on business loans | 16, Interest | 2025 form: 16a mortgage, 16b other. The 2026 form has 16a mortgage, 16b vehicle loan, 16c other |
| Accountant, attorney, business tax preparation | 17, Legal and professional services | Fees that are ordinary and necessary and directly related to the business |
| Office supplies and postage | 18, Office expense | The two items the instructions name |
| Renting equipment or a vehicle | 20a, Rent or lease | Business portion of the rental cost |
| Office or desk space | 20b, Rent or lease | “Other property, such as office space in a building” |
| Fixing equipment | 21, Repairs and maintenance | Repairs that don’t add value or appreciably prolong its life; not the value of your own labor |
| Materials, books, professional instruments used within a year | 22, Supplies | Deduct to the extent used in the business that year |
| Business licenses, regulatory fees | 23, Taxes and licenses | Not federal income tax or self-employment tax |
| Flights and hotels on overnight business trips | 24a, Travel | Lodging and transportation away from your tax home; no meals here |
| A meal with a client | 24b, Deductible meals | In most cases 50% of the cost; no entertainment |
| Utilities for the business | 25, Utilities | Base rate of the first phone line into your home isn’t deductible |
| Employee pay | 26, Wages | Not amounts you pay yourself |
| Technology and software tools, such as tax preparation software and subscription services paid to manage your business | Part V (line 48), totaled on 27b | Ordinary and necessary, directly related to operating your business; not tools that must be depreciated or amortized |
| A home office | 30, Business use of your home | Form 8829, or the simplified method: in most cases $5 per square foot, up to 300 square feet |
On the equipment row: the instructions describe a de minimis safe harbor that, if you elect it, lets you deduct tangible property up to $2,500 per item or invoice (or $5,000 if you have an applicable financial statement) as an other expense in Part V. On the car row: the 2025 instructions give 70 cents a mile and conditions for using the rate; Publication 334 gives 72.5 cents a mile for 2026. On contract labor: the 2025 instructions say you must file Form 1099-NEC for contract labor payments “of $600 or more during the year,” and Publication 334 says that for reportable payments made after 2025 the threshold increases to $2,000. So record who you paid, not just how much. On the software row: the instructions add that “Most computer software expenses must be capitalized and depreciated or expensed under section 179.”
Part V is also where any ordinary and necessary expense goes that has no line of its own. You list each type and amount separately there.
What a record needs to show
Publication 583 says the law generally does not require “any specific kind of records,” as long as your system “clearly shows your income and expenses.” For an expense, it says your supporting documents “should show the amount paid and that the amount was for a business expense.” The documents it lists include canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips.
A bank or card statement alone is not enough. Publication 583: “Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction.” Keep the receipt or invoice too.
Travel, meals, gifts and car use have stricter rules, set out in chapter 5 of Publication 463. Its Table 5-1 lists the elements you must be able to prove:
- Amount: the cost of each separate expense. For a car, also the mileage for each business use and the total miles for the year.
- Time: the date of the expense. For trips, the dates you left and returned.
- Place or description: the destination of a trip or business drive, or a description of a gift.
- Business purpose: the business reason for the expense.
Publication 463 says documentary evidence “will ordinarily be considered adequate if it shows the amount, date, place, and essential character of the expense.” A restaurant receipt is enough for a business meal if it has the restaurant’s name and location, the number of people served, and the date and amount. You generally need documentary evidence such as receipts for these expenses, except for an expense (other than lodging) under $75 and a few other cases the publication lists. Even then, the written record itself is still needed.
The same chapter adds: “You can’t deduct amounts that you approximate or estimate.” And “if you prepare a record on a computer, it is considered an adequate record.”
A minimal monthly routine
Publication 583 notes that “you may forget expenses when you prepare your tax return unless you record them when they occur,” and that you “should reconcile your checking account each month.” A routine built on those two points:
When you spend
- Capture the receipt the same day (a photo or scan; see scanning receipts on iPhone and how to organize receipts).
- Write the business purpose on it or next to it, in a few words: “Client lunch, Acme, Q3 proposal.”
- For car use, keep a log. Publication 463 says a log kept weekly that accounts for the week’s use “is considered a timely kept record.”
Once a month
- Pull up the business account and card statements for the month.
- Match each line to a receipt or invoice, and request copies of any that are missing.
- Assign each expense a Schedule C line from the table above.
- Mark mixed-use items and record the business share.
- Reconcile: the statement balance and your records should agree.
- Note each contractor you paid and the running total for the year.
At year end, total each line and file the year’s records together. How long to keep them is covered in which receipts to keep for taxes.
A worked month
A freelance designer’s month in 2026, after the monthly pass:
| Date | Merchant | Amount | Business purpose | Schedule C line |
|---|---|---|---|---|
| Mar 3 | Coworking space | $250.00 | Desk rental, March | 20b |
| Mar 7 | Online bookkeeping service | $30.00 | Monthly subscription to manage the business’s books | Part V (48) |
| Mar 12 | Restaurant | $64.00 | Lunch with client, 2 people, brand review | 24b (in most cases 50% of the cost, $32.00) |
| Mar 18 | Office supply store | $23.40 | Printer paper, mailers | 18 |
| Mar 1–31 | Mileage log | 180 business miles | Client visits | 9 (2026 standard rate, 72.5 cents: $130.50, if the car qualifies) |
The record keeps the full $64.00; the 50% limit applies when the deduction is figured. Trips from home to the coworking desk, if that is the designer’s regular place of work, stay out of the mileage log as commuting.
Spreadsheet, app or notebook
Because the IRS lets you choose “any recordkeeping system suited to your business,” a spreadsheet works as well as dedicated software, provided it carries the fields above: date, merchant, amount, payment method, business purpose, Schedule C line, and a link or reference to the receipt image. For setting one up, see tracking expenses in a spreadsheet.
General information, not tax, legal or accounting advice. Rules differ by country and change; check anything you rely on with your tax authority or an accountant.