Question 1

What counts as a business expense?

Accepted Answer

A business expense is any ordinary and necessary cost incurred while running your business. This includes rent, payroll, insurance, utilities, marketing, supplies, software subscriptions, professional services, equipment, and travel. The IRS defines a deductible business expense as one that is both ordinary (common in your industry) and necessary (helpful and appropriate for your business).

Question 2

Are business expenses tax deductible?

Accepted Answer

Yes. Most ordinary and necessary business expenses are fully deductible on your federal business tax return, reducing your taxable income dollar for dollar. Common deductible expenses include rent, payroll, insurance premiums, utilities, office supplies, software, marketing, and professional services. Capital expenditures like equipment may need to be depreciated over time rather than deducted in a single year. Keep records and receipts for all expenses.

Question 3

What is a good expense-to-revenue ratio for a small business?

Accepted Answer

A healthy expense-to-revenue ratio varies significantly by industry. Service businesses typically run 40 to 60 percent expenses to revenue, leaving 40 to 60 percent gross margin. Retail businesses often run 70 to 80 percent due to cost of goods. Restaurants can run 85 to 95 percent, making margins extremely tight. Software and technology businesses can often keep expenses below 50 percent of revenue. Track your ratio over time — a rising ratio is the earliest sign that your business is heading toward unprofitability.

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