Can I claim expenses if my business makes very little profit?

Understanding the question: expenses when profit is tiny

When your business makes very little profit (or even a loss), it’s natural to wonder whether you can still claim business expenses. The short, practical answer in most everyday situations is: yes, legitimate business expenses are generally still deductible even if profits are small. But the long answer matters, because the rules, the paperwork, and the “why” behind the expense all become more important when profits are low. Tax authorities tend to care less about how impressive your profit figure is and more about whether you are genuinely running a business, whether your expenses are real and properly supported, and whether they are incurred wholly and exclusively (or primarily) for business purposes under the applicable rules.

This article walks through how expense claims typically work when profits are minimal, what risks and red flags to avoid, how losses can be treated, how to prove you’re trading commercially, and how to handle common tricky categories like home office costs, vehicles, travel, entertainment, and “mixed-use” spending. It also offers practical recordkeeping tips and planning ideas so your expense claims are defensible and your tax position is calmer.

What it means to “claim expenses”

Claiming expenses usually means deducting qualifying business costs from business income to arrive at taxable profit. If the expenses are higher than income, the result is a loss. That loss may be usable to reduce other taxable income (depending on the rules and your business structure), or it may be carried forward to offset future profits.

It’s easy to assume that expenses are only “allowed” when you make a healthy profit. In reality, a business often has upfront costs, seasonal swings, or periods of investment where profit is slim or negative. The tax system generally recognizes that businesses need to spend money to earn money. So the key question is not “Did I make much profit?” but “Were these costs incurred for the purpose of running the business and generating business income?”

Low profit does not automatically block expense deductions

If your business is genuinely operating as a business, low profit alone usually doesn’t prevent you from deducting legitimate costs. Many businesses have lean years: a new consultancy building a client base, a craft seller paying for tools and materials, a freelancer with fluctuating demand, or a small retailer experimenting with advertising. Claiming expenses in these circumstances can be normal and expected.

However, low or repeated losses can increase scrutiny. Not because losses are forbidden, but because ongoing low profit can raise doubts about whether the activity is really a commercial trade or more of a hobby or personal project. This distinction matters because business expenses are generally deductible; personal or hobby expenses generally are not. When your numbers show minimal profit year after year, you should be prepared to demonstrate business intent and commerciality.

Business vs hobby: why it matters more when profits are small

The biggest practical issue that comes up with low-profit businesses is the business-versus-hobby question. A hobby is typically something you do primarily for enjoyment, with occasional income that may be incidental. A business is something you carry on with the intention of making a profit, using a commercial approach.

When profits are small, it helps to be able to point to evidence of commercial behavior, such as:

Maintaining a separate business bank account and using it for business transactions.

Keeping proper records and invoices, and tracking income and costs systematically.

Marketing your services or products, having a website, advertising, or a sales strategy.

Pricing your products or services in a way that can realistically lead to profit.

Having repeat customers or taking steps to secure repeat business.

Having a business plan or at least documented plans and targets.

Changing approach when something isn’t working (for example, switching suppliers, changing prices, refining your offering).

Even if you don’t have all of these, the overall picture should show you’re trying to run the activity as a business. If your activity looks more like personal enjoyment subsidized by occasional income, expense deductions can become harder to justify, especially for discretionary categories like travel, equipment upgrades, or lifestyle-adjacent costs.

The core test: is the expense genuinely for the business?

Most tax systems apply some form of rule that expenses must be incurred wholly and exclusively for business (or at least primarily and directly for business, with careful allocation for mixed use). In plain language: the expense should be something you had to spend in order to carry on the business, or something that is clearly part of earning business income.

When profit is small, it’s not that the rules change, but the importance of meeting the rules increases. It becomes more important to show:

What you bought, when you bought it, and how it relates to your business.

Why the expense is necessary or reasonable for your business activity.

That the expense is not primarily personal in nature.

That any personal element is identified and excluded or properly apportioned.

Reasonableness and “why would a business do that?”

Some expenses are straightforward: raw materials, shipping, transaction fees, domain hosting, accounting software, insurance, repairs to business equipment, professional subscriptions, and similar. Others can look questionable, especially if your business is barely profitable: expensive electronics, luxury travel, high-end meals, significant vehicle costs, or “training” that seems more like a personal interest.

Tax authorities often apply a common-sense lens: would a commercially minded business owner incur this cost for the purpose of the business? A low-profit business can still buy useful equipment, but the “why” should be clear. If you claim a premium laptop, you should be able to show it’s needed for the work and used for the work. If you claim a conference trip, you should be able to show it’s related to your industry, and the schedule reflects business activity rather than a holiday with a token business component.

Revenue expenses vs capital expenses: the timing difference

A common point of confusion is that not all spending is deducted in the same way. Many systems distinguish between revenue expenses (day-to-day running costs) and capital expenses (assets or improvements that provide long-term benefit).

Revenue expenses are typically deducted in the period you incur them, reducing profit immediately. Examples include rent, utilities, stationery, routine advertising, and small tools consumed in the business.

Capital expenses often aren’t deducted all at once. Instead, you may claim depreciation or capital allowances over time, or you may only recognize the cost when you dispose of the asset (depending on local rules). Examples include major machinery, vehicles, large computer equipment, and sometimes significant website development or property improvements.

This matters for low-profit businesses because you might “feel” like you spent a lot and should deduct it all, but the tax treatment may spread the relief across multiple years. If you’re investing in equipment, your taxable profit might not drop as much as expected in year one, or it might drop in a different pattern than your cash flow.

Can claiming expenses create or increase a loss?

In many cases, yes. If your business income is low and your valid expenses are higher, the result is a trading loss. Whether that loss gives you immediate tax benefit depends on your structure (for example, sole trader vs company), your other income, and local loss relief rules.

Losses can be useful, but they’re also a common trigger for questions. If losses occur because you are genuinely building a business or experiencing a temporary downturn, that’s typically normal. If losses occur because personal spending is being pushed through the business or expenses aren’t properly apportioned, that’s risky. The difference often comes down to documentation and the commercial story your records tell.

Loss relief in plain terms

Different countries handle losses differently, but the general themes are similar. Losses may be:

Carried forward to offset future profits from the same business.

Carried back to offset profits from earlier years (in some systems and with limits).

Offset against other income you have (sometimes allowed for individuals, sometimes restricted or subject to conditions).

Restricted if the activity is not conducted commercially or is considered more like a hobby.

Restricted for certain sectors or “side businesses” where repeated losses are common, depending on the jurisdiction.

The key takeaway is that losses can still be legitimate, but you should know how your local rules treat them. If you run a very low-profit business alongside employment income, you may be hoping losses reduce your personal tax bill. That can be possible in some places and limited in others. When in doubt, it’s worth getting advice because the way you structure the business and record expenses can affect whether you actually benefit from losses.

Common categories of expenses: what’s usually fine and what needs care

Low-profit businesses often have the same kinds of costs as any other business. The categories below are common, but the treatment can vary depending on your situation, your business type, and local rules. The emphasis here is on how to think about them so that your claims are sensible and defensible.

Home office and working from home

If you run a business from home, you may be able to claim some of your home costs. This is one of the most common areas where people overclaim or under-document, especially when profits are small.

Typically, you can claim a reasonable portion of costs like electricity, heating, internet, and sometimes rent or mortgage interest (not usually the principal repayment). The key is apportionment: you usually need a method that makes sense, such as by floor area and time used for business.

There are often simplified methods available too, such as a flat rate per hour or per month, depending on local rules. Simplified methods can be easier and reduce dispute risk, but they may not maximize deductions. For very low-profit businesses, a simplified method is often appealing because it’s tidy and easier to justify.

Be cautious about claiming large portions of housing costs if your business use is minimal or occasional. Also be careful if you’re thinking of claiming a room is “exclusively” used for business, because exclusive-use claims can sometimes have implications for other tax treatments (for example, when selling the property). Even when exclusive use is true, the recordkeeping needs to be solid.

Phone and internet

Phone and internet costs are commonly deductible to the extent they relate to the business. If the line is used for both personal and business purposes, you generally need to split it. You can do this by reviewing usage patterns, estimating a reasonable percentage, and applying it consistently. If your business is low-profit, don’t be tempted to claim 100% unless you truly use a separate business line or you can prove it’s exclusively business.

Itemized bills, call logs, or at least a documented rationale can help. A good habit is to keep screenshots or PDFs of monthly invoices and note your apportionment percentage in your bookkeeping system.

Vehicle and travel costs

Vehicle costs can be a legitimate business expense, but they are also a frequent source of disputes, particularly when profits are low. The key question is whether the travel is business travel, such as traveling to meet clients, deliver goods, attend business events, or travel between work sites.

Commuting is commonly not treated as business travel for expense purposes in many jurisdictions (though definitions vary). If your “business” is mainly based at home, trips from home to a client location can be business travel in some systems, but it depends on whether home is accepted as your base of operations and how your rules treat “regular” vs “temporary” workplaces.

Recordkeeping is crucial. Keep a mileage log that records date, start and end locations, purpose, and distance. If you use your vehicle for both business and personal use, you will likely need to apportion costs or use an approved mileage method. A low-profit business can claim vehicle costs, but sloppy mileage tracking is an easy way to lose the deduction.

Meals and entertainment

Meals are tricky. Some systems allow business meals in certain contexts; others restrict them heavily or deny them unless very specific conditions are met. Entertainment is often restricted or disallowed. If your business makes little profit, aggressive claims here can look like personal lifestyle spending.

If you do incur legitimate client-related meal costs, document the business purpose, who attended, and what was discussed. Keep the receipt and note the context promptly. If the expense is more about socializing than business, consider not claiming it at all. When profit is low, conservative treatment in high-risk categories can reduce headaches.

Training, education, and professional development

Education costs can be deductible if they relate directly to your current business activity and help you maintain or improve skills you already use. They are more likely to be challenged if they look like you’re learning a new profession rather than improving your existing trade. For example, a photographer claiming a course on advanced lighting techniques may be more defensible than the same person claiming a course to become a qualified electrician.

If your profits are small, training costs may represent a large share of expenses, which can attract attention. Keep evidence: course outline, how it relates to your services, notes showing you applied the learning, and proof of payment. If there’s a personal benefit element, be cautious and consider whether apportionment or non-claiming is more appropriate.

Marketing, advertising, and website costs

Marketing is often an obvious and legitimate cost even for low-profit businesses. Social media ads, printing flyers, business cards, SEO tools, a website domain, hosting, and content creation can all be normal. The main pitfalls are personal-brand crossover and mixed use. If you’re an influencer-type business or your personal identity is closely tied to marketing, you need to keep business rationale clear.

Website development can sometimes be treated as capital expenditure depending on scope, while ongoing hosting and routine updates are often revenue expenses. Keep contracts, invoices, and a short explanation of what was delivered.

Software, subscriptions, and digital tools

Subscriptions to accounting software, design tools, project management apps, stock photo libraries, and industry databases are typically straightforward business expenses. The key is to ensure they’re genuinely used for business. If you subscribe to a streaming service and claim it as “research,” that’s likely risky unless your business truly requires it and you can justify it convincingly.

If a subscription is mixed-use, apportionment may be necessary. For example, a cloud storage plan used for both family photos and business deliverables should be split in a reasonable way.

Equipment and supplies

Equipment is often the biggest expense in a low-profit business. The treatment depends on whether the item is a small consumable supply or a longer-term asset. Tools, printer ink, packaging materials, and small accessories are usually day-to-day costs. Larger items like cameras, computers, specialized machinery, or high-end furniture may be capital items.

If your business barely makes profit, buying expensive equipment can be commercially sensible if it enables you to deliver services and generate future income. But keep the story coherent: why you needed it, how it supports revenue, and how much personal use is involved.

Rent, coworking, and studio space

Rent for a workspace, coworking membership, or studio space is typically deductible if it’s used for the business. Low-profit businesses sometimes rent space they don’t fully utilize, which can look questionable. If you do rent a studio or desk, keep the contract, proof of payment, and evidence of usage (booking records, photos of the setup, client meetings, production schedules).

If part of the space is used personally or shared with another activity, apportionment may be needed.

Insurance, licenses, and professional fees

Many businesses require insurance (professional indemnity, public liability), licenses, permits, and professional fees. These are usually clear business expenses. Even if your business profit is tiny, having appropriate insurance can be part of operating commercially, which can actually support the “this is a real business” narrative.

Accounting fees and bookkeeping costs are also commonly deductible. If you pay for professional advice to get set up properly, it can be money well spent when you’re low-profit because it reduces mistakes that can become costly later.

Inventory and cost of goods sold

If you sell products, the way you treat inventory can affect profits significantly. Many tax systems require you to account for inventory on hand at the end of the period, meaning not all purchases are immediately treated as expenses. Instead, you calculate the cost of goods sold based on opening inventory plus purchases minus closing inventory.

This can surprise low-profit sellers who feel like they “spent everything,” yet the tax computation still shows profit because stock remains unsold at year-end. Good inventory tracking prevents confusion and helps you plan cash flow for tax.

Mixed-use expenses: the biggest trap when profits are low

Mixed-use expenses are costs that have both business and personal elements. They are common in small businesses: phone, internet, vehicle, home utilities, laptops, and even clothing. The safest approach is to separate business and personal spending where you can (separate accounts, separate phone line, separate devices), and apportion reasonably where you can’t.

Overclaiming mixed-use expenses is one of the most common issues in low-profit businesses. If your business shows tiny profits but you claim large amounts of home costs, car costs, and personal-device costs, it can create an impression that the business is being used mainly to subsidize personal spending. That impression is what you want to avoid.

A simple rule of thumb: if you would have paid for the item anyway even without the business, be cautious. That doesn’t mean you can’t claim a portion, but it does mean you should be realistic and keep evidence.

What about expenses before you start trading?

Many businesses have pre-trading expenses: market research, initial website setup, training, equipment, sample materials, and branding costs before the first sale. Many tax regimes allow certain pre-trading expenses to be treated as if incurred on the first day of trading, within a time window and subject to conditions.

This is particularly relevant for low-profit businesses because the startup phase often produces little income. If you’re claiming pre-trading costs, keep strong records and be clear about when you actually began trading (for example, when you started offering goods or services to customers, launched your website, or actively marketed to secure work).

Cash basis vs accrual basis: why accounting method matters

Your accounting method affects when income and expenses are recognized. Under a cash basis approach, you generally record income when received and expenses when paid. Under an accrual (or traditional) approach, you generally record income when earned and expenses when incurred, regardless of payment timing.

For low-profit businesses, cash basis can feel simpler and can align better with cash flow, but it may not always be available or optimal. If you invoice near year-end but get paid later, cash basis may show lower income now (and higher later), which can affect whether you appear low-profit in a given year. Similarly, if you pay for a big expense upfront, cash basis may show a big deduction immediately (subject to capital rules).

Whatever method you use, consistency matters. Switching methods or adopting a method that produces repeated losses without a commercial reason can raise questions.

How tax authorities might view a very low-profit business

Tax authorities typically focus on compliance and correctness. A very low-profit business can be entirely legitimate. But if a business reports low or no profits year after year, authorities may look for signs of:

Non-commercial activity or a hobby being treated as a business.

Inflated or unsupported expense claims.

Private expenses being claimed as business costs.

Inconsistent records or missing documentation.

A pattern of losses used to reduce other taxable income (where the rules restrict this).

This doesn’t mean you should avoid claiming genuine expenses. It means you should claim them correctly and keep clean evidence. In many cases, strong bookkeeping is the difference between a routine filing and a stressful dispute.

Practical recordkeeping: make your claims defendable

When profits are small, you want your records to be especially tidy. The goal is to be able to answer, quickly and calmly, three questions: what did you spend, why was it for the business, and how did you calculate the business portion?

Good habits include:

Keep digital copies of receipts and invoices, organized by month and category.

Use accounting software or at least a spreadsheet that records date, supplier, description, category, amount, and payment method.

Maintain a separate business bank account and, if possible, a separate business card.

Write brief notes on receipts for ambiguous expenses (purpose, attendees, project name).

Keep mileage logs and calendar entries for client meetings and business travel.

Document apportionment methods for mixed-use costs and keep them consistent.

If you’re ever asked to explain a deduction, “I used 30% because that feels right” is weaker than “I reviewed three months of bills and usage, and 30% reflects business calls and data usage, documented here.”

Planning ideas for low-profit years

If profits are small, you may be in a phase of building, investing, or experimenting. Expense claims can support you, but planning can reduce surprises.

Consider these approaches:

Review pricing and margins. Low profit may reflect underpricing or costs that aren’t matched to revenue.

Separate essential expenses from optional ones. If an expense doesn’t clearly support revenue, think twice.

Track profitability by product or service line. You might find one offering is profitable and another drains resources.

Time capital purchases with your business reality, not just tax. Buying something “for the deduction” rarely makes sense if it doesn’t increase revenue potential.

Set aside cash for tax even in low-profit years, because tax can still arise depending on timing, accounting method, and other income.

Consider professional advice if losses are recurring and you’re unsure about allowable claims or loss relief.

Common misunderstandings to avoid

Low-profit businesses often fall into a few predictable misunderstandings. Clearing these up can prevent costly mistakes.

Misunderstanding 1: “If I made only a small amount, I can’t claim anything.” You generally can claim legitimate business costs; the profit figure doesn’t cancel your deductions.

Misunderstanding 2: “If I claim expenses, I’ll definitely get in trouble.” Claiming genuine expenses with proper records is normal. Problems usually arise from unsupported or personal claims.

Misunderstanding 3: “Everything I buy helps my business, so it’s deductible.” Many purchases have personal benefit or are only loosely connected to business. The connection must be real and the claim must follow the rules.

Misunderstanding 4: “I can claim 100% of my car/phone/home because I use it for work sometimes.” Mixed use typically requires apportionment unless you have clear exclusive business use.

Misunderstanding 5: “Losses are always refundable.” Loss relief rules vary. Losses may offset future profits rather than generating immediate cash benefit.

Examples: how low profit interacts with expenses

Example 1: Freelance designer with low income. A designer earns a modest amount while building a portfolio. They pay for design software, a domain name, hosting, and some advertising. These are clearly connected to the business and can typically be claimed. If the designer also buys a high-end tablet used for both drawing and personal entertainment, they should consider apportioning or demonstrating predominant business use.

Example 2: Craft seller with inventory. A seller makes a small profit but buys materials in bulk near year-end, leaving lots of unsold stock. The seller feels like profit should be zero because cash went out, but the tax calculation may still show profit if inventory remains. Better inventory accounting can explain the numbers and prevent mistaken over-claiming.

Example 3: New consultant with training costs. A consultant spends on a course that directly improves skills used for current consulting work. Even if profit is low, the expense may be legitimate. But if the course is a career change into a different field, the deduction may be restricted as it’s not maintaining existing skills.

When to be extra cautious

Some situations deserve extra caution when profits are very low:

If you are claiming repeated losses and trying to offset them against other income.

If your expenses include large lifestyle-adjacent items (travel, meals, clothing, vehicles, tech upgrades).

If you have substantial cash spending without clear receipts.

If you frequently pay business expenses from a personal account without documenting reimbursements.

If your business activity is sporadic and closely resembles a personal interest.

In these cases, it’s not that deductions are impossible—it’s that the burden of proving business purpose and correct apportionment becomes heavier in practice.

What to do if your business is genuinely tiny

Some businesses are legitimately small side ventures: a few jobs a month, seasonal sales, occasional consulting. Being small doesn’t automatically make it a hobby. But you should be realistic about the scale. If you only earn a small amount, your expense claims should generally look proportionate to that activity unless there’s a clear investment phase with a credible plan to grow.

One of the best practical moves is to separate finances. A dedicated account makes it easier to show business intent and easier to keep records. Another helpful move is to create a simple one-page business plan that describes your offer, target customers, marketing approach, and how you intend to become profitable. You may never be asked for it, but having it can guide your decisions and support your commercial narrative if questions arise.

Should you claim every allowable expense?

Just because an expense might be allowable doesn’t always mean it’s worth claiming, especially if it requires complex apportionment or creates disproportionate risk compared to the tax benefit. This is a judgment call. In low-profit situations, the tax benefit of an extra deduction might be small, but the complexity and potential dispute risk might be high.

That said, you shouldn’t avoid legitimate claims out of fear. The better approach is to claim what you can support with evidence and a clear business rationale, and to be conservative where personal benefit is significant or documentation is weak. Your goal is a return or set of accounts that makes sense, matches your business reality, and can be explained without stress.

Key takeaways

Yes, you can usually claim legitimate business expenses even if your business makes very little profit. Low profit doesn’t remove your right to deduct costs that are genuinely for the business. The bigger issue is proving that your activity is a real business and that your expenses are properly documented, correctly treated (revenue vs capital), and appropriately apportioned where there is personal use.

If your business is new, seasonal, or in an investment phase, low profit can be normal. Keep strong records, avoid pushing personal spending through the business, and be especially careful with mixed-use categories like home office, vehicles, and technology. If losses are recurring or you’re relying on them for tax relief against other income, it may be wise to get tailored advice to ensure your approach matches the rules in your jurisdiction and your business structure.