What are deductible business expenses according to the IRS?
The IRS code section 162 defines deductible business expenses "as those expenses which are ordinary and necessary and are incurred or paid during the taxable year in carrying on any trade or business. According to the IRS,
1. An “ordinary” expense is one that is common and accepted in the industry.
2. A “necessary” expense is one that is helpful and appropriate for the trade
3. The expense does not have to be indispensable in order for it to pass the ordinary or necessary test.
Furthermore, the IRS has stated that "an expense incurred prior to the establishment of a trade or business is not deductible under IRC Sec. 162. Instead they may either be non-deductible personal expenses or capitalizable costs."
The IRS has also stated that the it is important to differentiate business expenses from other expenses, such as the following expenses shown below;
1. Expenses used in calculating Cost of goods sold (COGS). COGS include the cost of products or raw materials including freight, storage, direct labor for workers who produce products, and factory overhead.
2. Capital expenses must be capitalized and either depreciated or amortized over an asset’s useful life.
3. Personal expenses are not deductible. Unfortunately some clients believe that any payments from a business account regardless of purpose are business expenses.