Small Business Expenses and Tax Deductions

Guidance for the Self-Employed and Sole Proprietors

There are two basic tax concepts new business owners need to add to their vocabulary: business expenses and capital expenses.

Business expenses are the cost of conducting a trade or business. These expenses are common costs of doing business, and are usually tax deductible if your business is for profit. For example, costs of renting a storefront, business travel, and paying employees are all deductible business expenses.

Capital expenses are the costs of purchasing specific assets, such as property or equipment, that usually have a life of a year or more and increase the quality and quantity of products and services. For example, if you own a landscaping business and you purchase mowers and excavating equipment, these costs are capital expenses and do not qualify as deductible business expenses. However, you can recover the money you spent on capital expenses through depreciation, amortization, or depletion. These recovery methods allow you to deduct part of your cost each year. In this way, you are able to recover your capital expenses over time.

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