What You Can Deduct as a Business (IRS Section 162)

This post is part of a 9-part series called “Turn Your Side Hustle Into a Tax-Saving Business.”
In this series, you'll learn how to legally lower your taxes, take advantage of IRS rules, and treat your side hustle like a real business.

Now That You Have a Business... Let’s Talk Deductions

If you’ve passed the test in "Do You Have a Business or Just a Hobby? (Understanding IRS Section 183)" and your side hustle counts as a business, you’re in for some good news:

You can now deduct your ordinary and necessary business expenses.

That phrase—“ordinary and necessary”—comes straight from IRS Section 162, which is the foundation of small business tax deductions.

Let’s break it down in plain English.

What Does Section 162 Say?

Section 162 says you can deduct:

"All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."

What Does That Mean?

• Ordinary = Common and accepted in your industry

• Necessary = Helpful and appropriate for your business (not necessarily required)

If it’s a reasonable cost of doing business, you may be able to deduct it.

Common Deductible Expenses

Here are some real-world examples of what you can often deduct:

Bonus: Home Office Deduction (Section 280A)

If you use part of your home regularly and exclusively for business, you might qualify for a home office deduction.

Two methods:

1. Simplified: $5 per square foot, up to 300 sq. ft.

2. Actual: Based on the % of your home used for business

This applies whether you rent or own—and can include utilities, rent, and mortgage interest (based on the % of business use).

We’ll go deeper in Post 7, but this is one of the most overlooked (and valuable) deductions for small business owners.

What You Can’t Deduct

Not everything qualifies, even if you think it helps your business. Common “no” items include:

• Personal clothing

• Haircuts or grooming

• Parking tickets or fines

• Most entertainment (Post 6 will cover this)

• Gifts over $25 per person/year

• Commuting costs (home to your main office)

Bonus Myth Buster: Is an LLC a Deduction?

A lot of people think forming an LLC will lower their taxes.

Forming an LLC is not a tax deduction.

However, you can deduct:

• The filing fees

• Any legal or accounting costs involved

• Ongoing state fees if it’s part of operating the business

But the LLC itself doesn’t unlock special tax breaks—it just gives you legal protection and flexibility.

How to Prove Your Deductions

The IRS expects you to:

• Keep receipts and invoices

• Track who, what, when, where, and why

• Store everything for at least 3 years (7 if possible)

Good records = strong deductions = fewer audit worries.

We’ll cover this in detail in Post 8: Recordkeeping and Preparer Responsibilities.

Final Thoughts

Section 162 is your best friend as a small business owner or self-employed person.

Every expense that’s ordinary, necessary, and properly documented could mean less tax owed—and more money in your pocket.

Ready to take the next step?

Let’s look at self-employment tax—what it is, how it works, and how to shrink it.

👉 Read Self-Employment Taxes Made Simple