What Is Publication 535, Business Expenses?

What Is Publication 535, Business Expenses?

Publication 535, Business Expenses is an IRS document that covers common business expenses and lays out the rules for deducting them. It tells you what you can and cannot deduct, and it includes some of the most frequent business deductions.

For an expense to qualify as deductible, it has to be both ordinary and necessary. Ordinary means it's common in your industry, and necessary means it's helpful or essential for running your business. As a business owner, you deduct these to lower your taxable income.

Key Takeaways

You should know that Publication 535 from the IRS discusses common business expenses and the deduction rules. It clarifies what's deductible and lists typical deductions. Remember, expenses need to be ordinary—common in your field—and necessary, meaning helpful or essential. Deducting them reduces your taxable income.

Understanding Publication 535, Business Expenses

Publication 535 is your go-to source for allowable expense deductions. It also guides you on keeping records and receipts to stay compliant when deducting.

Business expenses stand apart from costs of goods, personal expenses, and capital expenses—these can't double as business deductions. Some expenses, like capital ones, get different treatment and might need separate tax forms.

Your accounting method—cash or accrual—affects when you deduct expenses. With cash method, you deduct only after paying. With accrual, you deduct when the all-events test is met or economic performance happens. Publication 535 gives specifics on both.

IRS publications are booklets providing detailed tax guidance. They cover topics like medical expenses in Publication 502, bankruptcy in 908, disabilities in 907, depreciation in 946, education benefits in 970, tip income in 531, and more.

Most Common Business Expenses

For the full list of deductible expenses, check Publication 334. Common ones include raw materials, storage, repairs and maintenance, transportation and car expenses, utilities, interest, some startup costs, taxes, bad debts, wages and salaries, rent, insurance, advertising, office expenses, supplies, travel expenses, and meals and entertainment.

You must be careful when deducting; exaggerating or claiming personal expenses can lead to penalties, interest on owed taxes, or even criminal charges for fraud.

Publication 334: Tax Guide for Small Business

Related to 535 is Publication 334, aimed at small business owners who are sole proprietors or statutory employees. It covers calculating deductions, tax credits, and info for these groups.

A sole proprietor runs an unincorporated business alone and pays personal income tax on profits. Statutory employees, like contractors, work for a business without tax withholding by the employer.

Publication 463: Travel, Gift, and Car Expenses

Another relevant guide is Publication 463, which details deductible travel, entertainment, gift, and car expenses to cut taxable income.

New Rules Under the Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act overhauled the tax code, impacting deductible business expenses. It eliminated deductions like entertainment, employee parking, local lobbying, and domestic production activities. It also changed rules for meals in company cafeterias during travel.

The act lowered corporate tax rates for C corporations. For smaller businesses, it introduced deductions for pass-through entities like LLCs and sole proprietorships.

How Do You Qualify for Business Expense Deduction?

To qualify, an expense must be ordinary—common and accepted in your industry—and necessary—helpful and appropriate for your business.

What Cannot Be Written as a Business Expense?

Non-deductible expenses aren't directly related to your business, such as certain meals and entertainment, car payments, and home office deductions.

Is it Illegal to Write Off Personal Expenses as Business Expenses?

Deductions lower your taxable income, but personal expenses can't be written off against business income. If caught, you'll face penalties, interest, and possibly legal action if amounts are large.

The Bottom Line

Publication 535 is essential for understanding deductible expenses. It clarifies criteria, warns about non-compliance, and helps navigate tax changes. Stick to IRS guidelines to avoid penalties, and use it to handle evolving regulations efficiently.