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Business expenses are the cost of carrying on a
trade or business. These expenses are usually
deductible if the business is operated to make a
What Can I Deduct?
To be deductible, a business expense must be both ordinary and
necessary. 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.
It is important to separate business expenses from the following
- The expenses used to figure the cost of goods sold
- Capital Expenses
- Personal Expenses
Note: If you have an expense that is partly for business
and partly personal, separate the personal part from the business part.
Cost of Goods Sold
If your business manufactures products or purchases them for resale, some of
your expenses may be included in figuring the cost of goods sold. You deduct
the cost of goods sold from your gross receipt to figure your gross profit
for the year.
If you use an expense to figure the cost of goods sold, you cannot deduct
it again as a business expense.
The following are types of expenses that go into figuring the cost of
- The cost of product or raw materials, including the cost of having
them shipped to you.
- The cost of storing the products you sell.
- Direct labor costs (including contributions to pensions or annuity
plans) for workers who produce the products.
- Factory overhead expenses.
You must capitalize, rather than deduct, some costs. These costs
are a part of your investment in your business and are called capital
expenses. There are, in general, three types of costs you capitalize.
- Going into business.
- Business assets.
Generally, you cannot deduct personal, living, or family expenses. However,
if you have an expense for something that is used partly for business and
partly for personal purposes, divide the total cost between the business and
personal parts. You can deduct as a business expense only the business part.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct
expenses for the business use of your home. These expenses may include
mortgage interest, insurance, utilities, repairs, and depreciation. Refer to
Business Use of Your Home, and Standard Mileage Rates.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. Refer to
Travel, Entertainment, Gift, and Car Expenses. For a list of current and
prior year mileage rates see the
Other Types of Business Expenses
This list is not all inclusive of the types of business expenses that you
can deduct. For additional information, refer to