What Is IRS Publication 535?
IRS Publication 535, Business Expenses, is an essential document that discusses common business expenses and explains the rules for deducting these expenses. This guide delves into what is and isn’t deductible, providing a comprehensive list of the most common business deductions.
For a business expense to be deductible, it must be both ordinary and necessary. Ordinary expenses are common within a particular industry, while necessary expenses are either helpful or essential to conducting business. Deductions can help business owners lower their total taxable income.
Key Takeaways
- Understanding IRS Guidance: Publication 535 discusses common business expenses and provides rules for deductions.
- Defining Deductions: Expense deductions must be both ordinary (common in the industry) and necessary (helpful or essential) for business tasks.
- Reducing Taxable Income: Business owners leverage deductions to minimize taxable income.
Understanding IRS Publication 535
Publication 535 serves as the definitive source on what expenses are allowable deductions, including guidance on the necessary records and receipts for compliance.
Business expenses differ from the costs of goods, personal expenses, and capital expenses. These cannot be deducted as business expenses. The treatment of certain business expenses, like capital expenses, may require using different tax forms.
The taxpayer’s chosen accounting method—cash or accrual—affects when and how expenses can be deducted. Using the cash method, expenses can only be deducted after they are paid, whereas the accrual method allows deductions when the all-events test is satisfied or upon economic performance. Publication 535 details the guidelines for each method.
IRS publications provide detailed guidance on tax issues, with various topics covered by different publications. These topics include medical and dental expenses, bankruptcy, disability filings, property depreciation, education tax benefits, and tip income reporting, among others.
Most Common Business Expenses
For a complete list of deductible business expenses, consult IRS Publication 334. Common deductible expenses include:
- Raw materials
- Storage
- Repair and maintenance
- Transportation and car expenses
- Utilities
- Interest
- Startup costs
- Taxes
- Bad debts
- Wages and salaries
- Rent
- Insurance
- Advertising
- Office expenses
- Supplies
- Travel expenses
- Meals and entertainment expenses
Businesses must be meticulous in deducting expenses; exaggerating or deducting unallowable expenses, like personal costs, can result in severe penalties and interest on owed taxes. In severe cases, criminal charges could ensue.
Related IRS Publications
Publication 334: Tax Guide for Small Business
Publication 334 provides a comprehensive reference for small business owners, especially sole proprietors and statutory employees. It covers calculating business deductions, available business tax credits, and pertinent information for sole proprietors and statutory employees.
Publication 463: Travel, Gift, and Car Expenses
Publication 463 outlines deductible expenses related to travel, entertainment, gifts, and car usage. It helps individual taxpayers understand these specific deductions to reduce overall taxable income.
Changes Under the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 significantly altered the U.S. tax code. Key changes in regulation affect deductible business expenses, including the elimination of various deductions:
- Entertainment expenses during business activities
- Employee parking and commuting expenses
- Local lobbying costs
- Domestic production activities
- Company cafeteria meals (with specific exceptions)
Moreover, the Act introduced a lower corporate tax rate and a deduction for income from pass-through entities like LLCs and sole proprietorships.
Qualifying for Business Expense Deductions
For an expense to qualify as a deduction, it must be both ordinary and necessary. Ordinary expenses are common in your industry, while necessary expenses are helpful and appropriate for your business.
Non-Deductible Business Expenses
Non-deductible expenses are those not directly related to the business. Examples include meals and entertainment, car payments, and home office deductions typically considered personal expenses.
The Legal Implications of Misclassifying Expenses
Misclassifying personal expenses as business expenses is illegal. Though business deductions can reduce taxable income, personal expenses cannot be written off against business income. Misclassification can lead to penalties, interest on unpaid taxes, and possible legal action for significant discrepancies.
The Bottom Line
IRS Publication 535 is a critical guide for businesses handling deductible expenses. It clarifies subtle distinctions, warning against non-compliance and highlighting the effects of recent tax law changes. It stands as a comprehensive tax planning resource, ensuring businesses adhere to evolving tax regulations confidently and efficiently.
Related Terms: Publication 334, Publication 463, business tax credits, sole proprietorship, LLCs.
References
- Internal Revenue Service. “Publication 535 (2022), Business Expenses”.
- Internal Revenue Service. “Publications Online”.
- Internal Revenue Service. “About Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C)”.
- Internal Revenue Service. “Publication 463 (2022), Travel, Gift, and Car Expenses”.
- U.S. Congress. “H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”.
- Internal Revenue Service. “IRS Highlights Tax Reform Changes that Affect Businesses”.
