What Is Publication 535, Business Expenses?

Publication 535, Business Expenses is an Internal Revenue Service (IRS) document that discusses common business expenses and explains the rules for deducting business expenses. The guide explains what is and is not deductible, and lists some of the most common business deductions.

For a business expense to be deductible, it must be both ordinary and necessary. Ordinary expenses are common in a particular industry. Necessary expenses are either helpful or essential to conducting business. Business owners deduct expenses to bring down their total amount of taxable income.

Understanding Publication 535, Business Expenses 

Publication 535, Business Expenses is the definitive source on what expenses are allowable deductions. The guide also provides guidance on which records and receipts to keep when deducting business expenses to be fully compliant.

Business expenses are separate and distinct from the cost of goods, personal expenses, and capital expenses. These types of expenses cannot also count as business expenses. Certain types of business expenses, such as capital expenses, are treated differently than ordinary and necessary expenses; these types of expenses often require the taxpayer to use different tax forms.

Ultimately, the accounting method employed by the taxpayer—cash or accrual—determines when and how expenses can be deducted. Using the cash method, taxpayers can only deduct expenses after they are paid. With the accrual method, you can deduct expenses when the all-events test has been satisfied or when economic performance occurs. Publication 535 provides specific guidance for each of these accounting methods.

IRS publications are informational booklets written by the Internal Revenue Service that give taxpayers detailed guidance on tax issues. There are IRS Publications on a wide range of topics related to filing one's taxes. Some of these topics include medical and dental expenses (Publication 502), bankruptcy (Publication 908), filing your taxes as a person with a disability (Publication 907), how to depreciate property (Publication 946), tax benefits for education (Publication 970), reporting tip income (Publication 531), and many more.

Most Common Business Expenses

To find the complete list of business expenses that can be deducted, consult Publication 334. Here are some of the most common expenses businesses can deduct:

• Raw materials
• Storage
• Repair 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
• Meals and entertainment expenses

Businesses should be extremely mindful when deducting business expenses; exaggerating expenses or attempting to deduct unallowable expenses (such as personal expenses) can result in serious penalties—plus interest on the amount of taxes you owe. In some serious cases, the IRS may even pursue criminal charges for tax fraud.

Publication 334: Tax Guide for Small Business

A publication that is closely related to Publication 535 is Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C). This publication is a reference for small business owners who are sole proprietors and also for statutory employees. It provides information about calculating common business deductions, business tax credits available to small businesses, and other information pertinent to sole proprietors and statutory employees.

A sole proprietor is an individual who operates an unincorporated business with just one owner. They pay personal income tax on the profits made from their small business. Statutory employees, such as independent contractors, are employees who work for a business, but their employer is not required to withhold taxes from their earnings. 

Publication 463: Travel, Gift, and Car Expenses

Another guide that is relevant to Publication 535 is Publication 463: Travel, Gift, and Car Expenses. This publication explains the expenses associated with business activities that an individual taxpayer can deduct to reduce their overall taxable income, specifically travel, entertainment, gift, and car expenses.

New Rules Under the Tax Cuts and Jobs Act

In late 2017, the Tax Cuts and Jobs Act became law, overhauling the U.S. tax code for the first time in decades. This act affected the regulation of deductible business expenses.

Some changes under the new law include the elimination of certain deductions. For example, entertainment expenses spent in the course of doing business, payment for employee parking or other commuting expenses, local lobbying costs, and domestic production activities all cannot be deducted any longer. Another change involves rules allowing employees to deduct the cost of meals in company cafeterias while traveling for work.

The new tax code also includes a lower corporate tax rate, so C corporations pay a lower amount of tax overall. For smaller businesses, the new rules usher in a deduction for people who earn income from pass-through entities such as LLCs and sole proprietorships.

The Bottom Line

IRS Publication 535 serves as a vital guide for businesses navigating deductible expenses. From clarifying essential criteria to warning against non-compliance, the guide proves indispensable for efficient navigation of evolving tax regulations.

Beyond serving as a roadmap for businesses, the publication underscores the importance of strict adherence to IRS guidelines, cautioning against the exaggeration of expenses or the deduction of unallowable costs, with penalties as potential consequences. Furthermore, the guide addresses the impact of the Tax Cuts and Jobs Act on deductible business expenses, making it an essential and comprehensive resource for businesses navigating the complexities of ever-evolving tax regulations with efficiency and confidence.