IRS Publication 535 (Business Expenses)

What Is IRS Publication 535?

IRS Publication 535 refers to the Internal Revenue Service (IRS) tax document that provides guidance on what types of business expenses are deductible when filing a tax return. IRS Publication 535 covers the rules for deducting business expenses and outlines the most common items that taxpayers deduct.

In order to be deductible, a business expense must be both ordinary and necessary. Ordinary expenses are ones that are common in a particular industry. Necessary expenses are those that are helpful or essential to conducting business. Business owners deduct expenses in order to bring down their total amount of taxable income. In this way, the amount that they pay in tax reflects their net profit, rather than a gross number.

Understanding IRS Publication 535 

IRS Publication 535 is the definitive source when it comes to what expenses are allowed and which are not. In comparison, Publication 334 is a tax guide for small businesses. Publication 463 covers travel, entertainment, gift, and car expenses. Publication 525 explains the difference between taxable and nontaxable income. Publication 529 covers miscellaneous deductions and Publication 587 explains regulations regarding using one’s home for business purposes.

Business expenses are separate and distinct from the cost of goods, personal expenses, and capital expenses. Taking any of the latter three expenses means those costs cannot also count as business expenses. 

Certain types of business expenses, such as capital expenses, are treated differently than ordinary and necessary expenses, and often require the taxpayer to use different tax forms. The accounting method employed by the taxpayer determines when and how expenses can be deducted.

New Rules Under the Tax Cuts and Jobs Act

In later 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.