Tax Deductions 101: What Business Expenses Actually Qualify?

Surprisingly (or maybe not…), the Internal Revenue Code doesn’t provide a neat little list of exactly what can and can’t be deducted as a business expense. Instead, it gives us this broad guideline:

“All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

Sounds simple, right? Well, not exactly. The IRS and business owners don’t always see eye to eye on what qualifies as “ordinary and necessary.” Let’s take a closer look at what you can deduct—and what might raise a few eyebrows.

The Basics

To be deductible, an expense must be both:

• Ordinary – Common and accepted in your industry. (For example, a security system for a jewelry store.)
• Necessary – Helpful and appropriate for your business. (A restaurant keeping an EpiPen on hand, for instance.)

And while the IRS doesn’t explicitly say expenses must be reasonable, that’s generally understood. An EpiPen? Sure. A diamond-encrusted EpiPen? That’s probably a no.

What Wouldn’t Count?

The IRS has a habit of questioning expenses that seem, well, a little too creative.

• Private jet travel – the IRS probably expects you to fly commercial.
• Divorce-related legal fees – Even if your business assets are at stake, these fees are considered personal expenses.
• Household employment costs – This is a big one! If you run a business from home and hire a nanny, housekeeper, or senior caregiver, their wages aren’t deductible. Even if your nanny cares for your children so you can work uninterrupted, they don’t directly contribute to your business. The IRS won’t consider them business employees, so you can’t deduct their pay as a business expense.

Think Before You Deduct

Some expenses are obviously deductible, and some… not so much. If it feels personal, extravagant, or just a little too good to be true, it might be worth double-checking before claiming it. When in doubt, consulting a tax professional can save you from costly surprises later.

Have questions about how to set up your household payroll and taxes correctly? We’re here to help! Schedule a complimentary consultation or check out the household labor and tax laws in your state.