IRS Business Expense Deduction Rules: The Complete Guide for Freelancers
Everything the IRS requires to deduct a business expense — the ordinary-and-necessary test, documentation standards, record retention rules, and how to build a system that survives an audit.
Jennifer Walsh
CPA, Tax Advisor
If you're self-employed in the United States, your expense records are your financial foundation. The IRS can disallow deductions that lack proper documentation — resulting in a larger tax bill and potential penalties. This guide explains what makes an expense deductible, what records you need to keep, and how to build a system that holds up under scrutiny.
The Ordinary-and-Necessary Test
Under IRC Section 162, a business expense must be both 'ordinary' (common and accepted in your industry) and 'necessary' (helpful and appropriate for your business). An expense doesn't have to be indispensable — it just has to be a normal cost of doing business in your field.
- Ordinary: software subscriptions, client meals, professional development, office supplies
- Necessary: the cost must serve a clear business purpose
- Personal expenses are never deductible — even if used partly for work (see the mixed-use rules)
- Lavish or extravagant expenses are not deductible regardless of business purpose
What the IRS Requires on Every Business Receipt
- Date of the transaction
- Vendor name and address
- Amount paid (including any sales tax)
- Business purpose of the purchase
- For meals and entertainment: names of attendees and business relationship
How Long to Keep Records
The IRS generally has three years from your return's due date to audit you — but six years if it suspects you underreported income by more than 25%. Keep all business expense records for at least six years to be safe. Digital copies are fully acceptable.
ReceiptOne stores receipts for 10+ years and automatically captures merchant name, date, amount, and sales tax — everything the IRS requires, ready when you need it.
Common Deductible Categories for Freelancers
- Home office (Form 8829 or simplified method)
- Business vehicle mileage (IRS standard rate or actual expenses)
- Professional development and education
- Software, tools, and subscriptions
- Business meals (50% deductible with proper documentation)
- Health insurance premiums (if self-employed)
- Retirement contributions (SEP-IRA, Solo 401k)
- Business phone and internet (proportional to business use)
Mixed-Use Expenses
When an expense serves both personal and business purposes — your phone, internet, or car — you can only deduct the business-use percentage. Track your usage carefully and be conservative: the IRS scrutinizes mixed-use claims closely.