If you file Schedule C, categorizing expenses correctly makes your return easier to prepare and your records easier to explain.

This guide follows the 2025 Schedule C, the version used for 2025 federal income tax returns filed during the 2026 filing season. Always use the IRS form and instructions for the tax year you are filing because lines and rules can change.

The Basic Rule

A business expense generally must be ordinary and necessary. The IRS describes an ordinary expense as one that is common and accepted in your field. A necessary expense is helpful and appropriate for your business; it does not have to be indispensable.

Only deduct the business portion of a mixed personal and business expense.

Part II: Expense Categories

Line 8 — Advertising

Costs to promote your business, such as online ads, printed advertising, and business cards. Website hosting used for a business often fits here or under another reasonable category, depending on the facts. Use a consistent method.

Line 9 — Car and Truck Expenses

The allowable business-use cost of a vehicle. Depending on your facts and eligibility, you may use the standard mileage rate or actual expenses. Keep a mileage log and the records required for the method you claim. Commuting is generally not deductible.

Line 10 — Commissions and Fees

Commissions and fees paid in connection with your business, such as certain sales commissions and referral fees. Do not use this line for contract labor that belongs on Line 11.

Line 11 — Contract Labor

Amounts paid to nonemployees for services performed for your business. Do not include employee wages or payments deducted elsewhere.

Information-return rules can change. For payments made in 2026, the general Form 1099-NEC reporting threshold increased to $2,000 from the $600 threshold that applied to payments made in 2025. Check the instructions for the year of payment and review any exceptions.

Line 12 — Depletion

Depletion applies to certain natural resources, such as mineral property or timber. Many small businesses leave this line blank.

Line 13 — Depreciation and Section 179 Expense Deduction

The allowable cost recovery for business property, such as equipment, furniture, and computers. Depending on the asset and your situation, depreciation, bonus depreciation, or a section 179 deduction may apply. Form 4562 may be required.

Repairs are different from purchases or improvements that must be capitalized.

Line 14 — Employee Benefit Programs

Deductible contributions to employee benefit programs that are not reported elsewhere, such as certain accident and health plans. Do not enter your own self-employed health insurance deduction here.

Line 15 — Insurance (Other Than Health)

Premiums for business insurance, such as liability, malpractice, or business property coverage. Do not include amounts already claimed through a vehicle deduction or a home office calculation.

Lines 16a and 16b — Interest

  • Line 16a: mortgage interest paid to banks or other financial institutions for business real property other than your main home.
  • Line 16b: other business interest.

Allocate interest when debt has both business and personal uses. Additional limitations can apply.

Line 17 — Legal and Professional Services

Fees for services directly related to your business, such as accounting and legal services. Only the business portion of tax-preparation fees belongs here.

Line 18 — Office Expense

Office supplies and postage. Some businesses also use this line for closely related office costs. Apply a reasonable and consistent classification and do not deduct the same expense twice.

Line 19 — Pension and Profit-Sharing Plans

Deductible contributions for employees. Do not include contributions for yourself as a self-employed person on this line.

Lines 20a and 20b — Rent or Lease

  • Line 20a: the business portion of rent or lease payments for vehicles, machinery, and equipment.
  • Line 20b: rent or lease payments for other business property, such as office space.

Special rules can apply to leased vehicles.

Line 21 — Repairs and Maintenance

Incidental repairs and maintenance that do not add value to property or appreciably prolong its life. Amounts paid to restore, replace, or improve property may need to be capitalized instead.

Line 22 — Supplies

Materials and supplies used or consumed in your business. Inventory and materials included in cost of goods sold belong in Part III instead.

Line 23 — Taxes and Licenses

Certain taxes and license fees related to your business, including:

  • State and local sales taxes imposed on you as the seller if you included them in gross receipts
  • Real estate and personal property taxes on business assets
  • Licenses and regulatory fees
  • The employer share of Social Security and Medicare taxes paid for employees
  • Federal unemployment tax and certain federal highway use tax

Do not enter federal income tax, self-employment tax, estate or gift tax, or taxes assessed for improvements.

Line 24a — Travel

Business travel expenses while away from your tax home, such as transportation and lodging. Keep records showing the time, place, and business purpose.

Line 24b — Deductible Meals

Enter your deductible business meal expenses. In most cases, the deduction is 50% of the qualifying amount. The IRS applies conditions: for example, the expense must be ordinary and necessary, not lavish or extravagant, and you or your employee must be present.

Entertainment expenses generally do not belong on this line.

Line 25 — Utilities

Business utilities, such as electricity and telephone service. The cost of the first telephone line to your home is not deductible even if you use it for business. Deduct only the business share of mixed-use services.

Home utilities claimed through a home office calculation should not also be deducted here.

Line 26 — Wages

Wages paid to employees, reduced by applicable employment credits. Do not include your own withdrawals or payments to independent contractors.

Line 27a — Energy Efficient Commercial Buildings Deduction

For the current form, Line 27a is specifically for the energy efficient commercial buildings deduction. It is not the catch-all line for other expenses.

Line 27b — Other Expenses

Ordinary and necessary business expenses that do not fit another line. Itemize them in Part V, then bring the Line 48 total to Line 27b.

Examples can include bank fees, payment-processing fees, business dues, and other costs that do not clearly belong in a named category.

Important Costs Outside Part II

  • Cost of goods sold: calculate this in Part III if your business buys or produces merchandise.
  • Business use of your home: enter the allowable amount on Line 30. Use Form 8829 for the actual-expense method or the worksheet in the Schedule C instructions for the simplified method.
  • Self-employed health insurance: when eligible, claim this on Schedule 1 rather than Schedule C.
  • Certain self-employed retirement contributions: these are generally handled outside Schedule C.

Common Categorization Mistakes

  1. Mixing personal and business costs without allocating the business portion.
  2. Deducting the same expense twice.
  3. Treating an improvement or asset purchase as a routine repair.
  4. Putting inventory costs in supplies instead of cost of goods sold.
  5. Entering other expenses on Line 27a instead of the current Line 27b.
  6. Relying on a bank statement alone when additional records are needed to show business purpose.

Build a Defensible System

The best category is the one that matches the IRS form, fits the facts, and is supported by your records. Simple-C helps organize transactions into Schedule C categories so you can review your totals throughout the year and prepare a clean breakdown at filing time.

This article provides general information, not tax advice. It discusses the 2025 Schedule C used for returns filed during the 2026 filing season. Review the instructions for your tax year and ask a qualified tax professional about uncertain classifications.

Sources