One of the most common questions of self-employed business owners is “How much should I deduct?”

The obvious answer is only to deduct those business expenses you actually incurred.  But if you’re like most people, you don’t have a perfect record keeping system and you’re not always sure whether or not you made money – or at least how much exactly – in your solo business. 

On the other hand, friends and bloggers may advise you to deduct everything!  Talked to a friend about your business over lunch?  Deduct that meal.  Thought about your business while jogging? Write off that treadmill.

The truth is, that’s not wise.  Even if you think you’re not likely to get audited, you should be aware of the IRS Hobby Rule.  If you run a business that loses money every year because of your deductions, the IRS may consider that activity to be a “hobby”, not a legitimate business that you are attempting to run for profit.  There are a variety of factors the IRS considers in determining whether or not you have a hobby or a business, including your dependence on the income, the manner in which you run your business, and how much profit you make. 

In general, if you don’t turn a profit in your business at least three out of every five years, you risk having your business considered a hobby.  If it’s a hobby – then you can’t deduct anything, even though you’ll still get taxed on your income!  That’s not a good position to be in.


What should I deduct?


You should deduct all the costs of running your business:

  • Products, materials, and supplies you bought and resold
  • Costs of shipping and delivery
  • Advertising, promotions, samples
  • Office supplies, printed materials
  • Professional fees – like your business accountant

One easy way to avoid running afoul of these rules is to only deduct those costs that were legitimately necessary to run your business.  The aromatherapy bubbling fountain you bought for your work desk might be nice to make your day brighter, but it’s probably not a deductible business expense. 

On the other hand, if you’re in sales, and you send a customer an aromatherapy bubbling fountain to sample your product or to thank her for introducing you to more clients, that’s deductible – up to the gift limit of $25. 


Special situations to note


There are many legitimate deductions you should take – just watch out for those cases where a full deduction may not be allowed.  For example:

  • Meals: in 2022, any business meal from a restaurant, whether takeout or dine-in, is 100% deductible.  But that’s not usually the case – normally, the limit is 50% of the cost of a meal.  In 2023, make sure you track your business meals in a separate category because they’ll only be 50% deductible.  The special exception was designed to help restaurants through the pandemic – that means meals taken from hot food bars at groceries aren’t eligible for the 100% deduction.


  • Entertainment: starting with the 2017 Tax Cuts and Jobs Act, entertainment expenses are no longer deductible.  If you take a client to a basketball game or a concert, that’s no longer deductible.  But food you bought at the venue is still deductible as a qualifying business meal, as long as you get a receipt that clearly separates how much of the cost is for food.  The exception to this rule is an industry where “entertainment” is a core part of the business – for example, if you take clients to a fashion show because you are in the fashion business, that is a deductible expense.  If you are a party plan direct seller, then the party costs are a deductible expense.


  • Gifts: you may generally deduct up to $25 per person per year in gifts.  So if you send a client a $200 blender as a thank you, you may only write off the first $25 of that cost.  If an item could be considered either a gift or entertainment (tickets to a game you send someone) then the IRS considers them entertainment and they are not deductible.  But you may fully deduct the cost of gifts less than $4 with your business name permanently on them – so those stress balls with your logo on them can be deducted and are not part of the $25 limit. 


  • Samples and Promotions: confusingly, even though they can look like entertainment and gifts, samples and promotions are 100% deductible.  So if you have an event at a carnival that is open to the public, for the purpose of getting your brand name out there and building goodwill in the community – then it’s not entertainment, and you can deduct 100% of that cost.  If you give a customer a sample of a new product or a discount on an item, that’s 100% deductible, not a gift. 


What if I actually made a loss?


It’s common to make a loss when you start out in business, or when the economy isn’t great.  Sometimes you make a loss also because you made a bad call – like buying up a bunch of supplies to make something and then discovering you couldn’t charge as much as you wanted. 

If you make a loss, just make sure to document your business thoroughly.  As the IRS says, no one factor outweighs all the others.  So if you legitimately make a loss five years in a row on your business, then make sure to deduct all those costs so you aren’t paying taxes while you’re not actually turning a profit. 

But if you’re making a loss that often, then you might also want to consider getting into a different business. 


Confused?  Talk to a tax professional through the BossTax app to get advice on your particular situation.