Business Expenses.
In plain English
Business expenses are the costs you pay to operate your business that the IRS lets you deduct from your income, which lowers the profit you pay tax on. To qualify, a cost must be both ordinary (common in your line of work) and necessary (helpful and appropriate for the business). Common categories include supplies, software, advertising, contractor pay, rent, and a share of phone or internet used for work. Personal costs do not count, and mixed-use items must be split between business and personal use.
01Why it matters
Every legitimate dollar of business expense you track cuts your taxable income, so sloppy records mean you hand the IRS more than you owe, while inflating expenses you cannot prove invites an audit.
02The math, step by step
Aisha runs a small consulting business and earns $60,000 in revenue. She spent $4,000 on software, $1,500 on advertising, and $2,000 on a contractor. Those $7,500 in expenses come off the top, so she is taxed on $52,500 of profit, not the full $60,000. Keeping receipts is what makes each deduction defensible.
03What this is NOT
A business expense is a deduction, not a credit. A deduction lowers the income you are taxed on, while a credit lowers your tax bill dollar for dollar. A $1,000 expense saves you only your tax rate on $1,000, not a full $1,000.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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