If you’re a freelancer or small business owner, this is one of the biggest questions you’ll face at tax time: what actually counts as a business expense? If you aren’t sure whether something can be written off as a business expense, don’t guess. Getting it wrong can either cost you money or raise red flags with the IRS.
The good news is, once you understand a few core rules, it becomes much easier to confidently take deductions without stressing about an audit.
Key Points:
- A business expense must be both ordinary and necessary to be deductible
- Mixing personal and business finances is one of the biggest tax mistakes
- Clear tracking and documentation can save you thousands (and headaches)
What Qualifies as a Business Expense?
At a high level, the IRS defines a business expense as something that is both ordinary (something that’s common in your industry) and necessary (something that’s genuinely helpful and appropriate for your business).
For example:
- Marketing and advertising
- Software subscriptions (like Xero, Canva, CRM tools)
- Office supplies
- Contractor payments
- Business-related travel
If you’re running a marketing agency, paying for ad spend or design tools is clearly a business expense. If you’re a contractor, materials and equipment fall into the same category.
Where people get confused is when an expense feels business-related but isn’t clearly tied to generating income.
If you’re unsure how to categorize your expenses, working with a professional can make a big difference. If you’re looking for virtual tax preparation this tax season, JBS Corp can help, especially if you’re managing multiple income streams or scaling your business.
What Counts as a Personal Expense?
Personal expenses are anything not directly tied to running your business. These are not deductible, even if you’re self-employed.
Common examples include:
- Groceries and everyday living costs
- Personal clothing (even if you “wear it for work”)
- Rent or mortgage (unless part qualifies for a home office deduction)
- Family expenses
A good rule of thumb: if you would have paid for it regardless of your business, it’s likely a personal expense.
One of the biggest mistakes small business owners make is trying to stretch personal expenses into business write-offs. Not only can this backfire during an audit, but it also creates messy books that are harder to manage year-round.
Can Something be Both a Business and Personal Expense?
Yes, and this is where things get nuanced.
Some expenses fall into a mixed-use category, meaning you can deduct a portion, but not the full amount.
Examples include:
- Your phone bill (business percentage vs. personal use)
- Internet costs
- Vehicle usage
- Home office space
How Do You Split Mixed-Use Expenses?
You need a reasonable, documented method.
For example:
- If you use your car 70% for business, you can deduct 70% of eligible vehicle expenses
- If your home office takes up 10% of your home, you may deduct 10% of certain housing costs
The key here is consistency and documentation. This is where solid bookkeeping becomes critical. If you don’t already have a system in place, check out our guides on setting up business finances to get organized properly.
What Are Common Write-Offs Small Business Owners Miss?
A lot of freelancers and small business owners actually underclaim deductions because they’re unsure what qualifies.
Some commonly missed deductions include:
- Business insurance
- Education or courses related to your work
- Bank fees and payment processing fees
- Mileage for business travel
- Part of your home office
On the flip side, some people try to write off things that are clearly personal (like full meals, clothing, or vacations), which can create risk.
Finding the right balance is key and that’s where guidance matters. JBS Corp offers virtual tax preparation around the country, helping freelancers and business owners maximize deductions while staying compliant.
Why is Separating Business and Personal Finances So Important?
When you mix finances, you miss deductions, your bookkeeping becomes messy, tax filing takes longer (and costs more), and you increase your risk of an audit.
Instead, you should:
- Open a separate business bank account
- Use a dedicated business credit or debit card
- Track expenses consistently throughout the year (Xero is a great tool for managing your expenses!)
Should You Track Expenses Yourself or Hire An Accountant?
If you have a simple business model, you stay consistent monthly, and you understand tax categories, DIY tracking could work well for your situation.
However, if you’re in a growing/scaling phase, you have multiple income streams, you aren’t sure what’s deductible, or if you want to save time and avoid mistakes, you should hire an accountant.
Final Thoughts
Understanding the difference between business and personal expenses helps you stay compliant and keep more of what you earn.
The goal isn’t to write off everything. It’s to take legitimate deductions, stay organized year-round, and overall build a financially healthy business
If you’re unsure where you stand or want a second set of eyes on your expenses, working with a professional can give you clarity and confidence.
And if you’re ready to simplify the process, JBS Corp offers virtual tax preparation around the country, helping freelancers and small business owners stay on track without the stress.
