Business Expenses

Tax law allows you to deduct the “ordinary and necessary” expenses of carrying on a trade or business.1



An ordinary expense is one that is common and accepted in your trade or business.



A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.


The “ordinary and necessary” test is easy to pass. For certain business expenses, however, the tax code imposes additional requirements. E.g., expenses for meals and lodging must not be “extravagant under the circumstances.”2


The two biggest reasons why you might lose a business expense deduction are (1) you didn't keep good tax records, particularly in cases where the tax code imposes additional substantiation requirements (see Record Keeping), or (2) you have to capitalize the expense (see Capitalization).


You could also lose deductions if the IRS thinks you aren't operating the business to make a profit. (See Hobby Loss Rule.)


Some common business expenses include:3



Automobile (and Other Business Vehicle) Expenses.



Entertainment Expenses.



Labor costs, including a salary or other compensation you receive as the owner-employee of your own corporation.



Repairs. See Repairs vs. Improvements.



Travel Expenses.



1           IRC Section 162(a).

2           IRC Section 162(a)(2).

3           Reg. Section 1.162-1(a).