IRS Publication 535 (Business Expenses)

Overview

IRS Publication 535 explains which business expenses are deductible and the rules for claiming them. To be deductible, an expense must be both ordinary (common in your industry) and necessary (helpful or appropriate for your business). Properly claiming business expenses reduces taxable income, but improper or exaggerated deductions can trigger penalties, interest, or criminal prosecution.

What qualifies as a deductible business expense

An expense is deductible if it meets both tests:
* Ordinary — common and accepted in your trade or industry.
* Necessary — helpful and appropriate for your business.

Certain costs that may seem business-related—such as capital expenses, personal expenses, and the cost of goods sold—are treated differently and are not deducted as ordinary business expenses. Capital expenditures (for example, equipment or building improvements) are generally recovered through depreciation or amortization under separate rules.

Common deductible expenses

Typical deductible business expenses include:
* Raw materials and supplies
* Rent and utilities
* Repair and maintenance
* Wages and salaries
* Insurance
* Interest
* Taxes (business-related)
* Bad debts
* Advertising and marketing
* Office expenses and supplies
* Transportation, travel, and car expenses
* Meals (subject to specific limits and rules)

Consult Publication 535 and related IRS guidance for detailed rules and limits that apply to specific categories.

What is not deductible

Non-deductible items generally include expenses that are personal in nature or specifically disallowed by law. Examples:
* Personal living expenses
* Commuting costs and most employee parking expenses
* Entertainment expenses incurred for business (subject to change based on current law)
* Local lobbying costs and certain domestic production activity deductions eliminated by recent tax law changes

Always check current IRS guidance for exceptions and any temporary provisions.

Accounting method and timing of deductions

When you can deduct an expense depends on your accounting method:
* Cash method — deduct expenses when they are actually paid.
* Accrual method — deduct expenses when the all-events test is satisfied or when economic performance occurs.

Publication 535 provides details on how these rules apply to different types of expenses.

Related IRS publications

• Publication 334 — Tax Guide for Small Business (useful for sole proprietors and Schedule C filers; covers common deductions and tax credits for small businesses).
• Publication 463 — Travel, Gift, and Car Expenses (details rules for travel, meals, entertainment, gifts, and vehicle expenses).

Changes under the Tax Cuts and Jobs Act (TCJA)

The TCJA (effective beginning in 2018) made several changes affecting business deductions, including:
* Eliminations or limitations on certain deductions (for example, many entertainment expenses and some commuting-related benefits).
* A lower corporate tax rate for C corporations.
* A new deduction for certain owners of pass-through entities (such as sole proprietorships, partnerships, and some S corporations).

Because tax law can change, review current IRS publications or consult a tax professional for the latest rules and applicability.

Recordkeeping and compliance

Keep adequate records and receipts to support all business deductions. Documentation should show the amount, time, place, business purpose, and business relationship for each expense. Poor recordkeeping or claiming personal expenses as business expenses can result in audits, penalties, and interest.

Penalties for improper deductions

Claiming personal expenses as business deductions or fabricating expenses can lead to:
* Disallowance of deductions and additional tax liability
* Penalties and interest
* Potential criminal charges in severe cases of fraud

Bottom line

Publication 535 is a central IRS resource for identifying deductible business expenses and understanding the rules that govern them. Use it, along with related IRS publications, to determine what you can deduct, how and when to deduct it, and what records to keep. When in doubt, consult a qualified tax professional to ensure compliance and to avoid costly mistakes.