skip navigation
Search Help
Navigation Help

Tax Map Index
ABCDEFGHI
JKLMNOPQR
STUVWXYZ#

International
Tax Topic Index

Affordable Care Act
Tax Topic Index

Exempt Organization
Tax Topic Index

FAQs
Forms
Publications
Tax Topics
Worksheets

Comments
About Tax Map

IRS.gov Website
Publication 535
taxmap/pubs/p535-001.htm#en_us_publink1000208605

Chapter 1
Deducting Business Expenses(p2)


What’s New(p2)

rule
taxmap/pubs/p535-001.htm#en_us_publink100078333
Determining deductible or capitalized costs.(p2)
Final regulations for tax years beginning on or after January 1, 2014, provide guidelines for determining whether certain costs are deductible or capitalized, and requirements for new de minimis safe harbors. See the related discussion under What Can I Deduct? and When Can I Deduct an Expense, later.

taxmap/pubs/p535-001.htm#en_us_publink1000272096Introduction

This chapter covers the general rules for deducting business expenses. Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit.

taxmap/pubs/p535-001.htm#TXMP03523dfa

Useful items

You may want to see:


Publication
 334 Tax Guide for Small Business
 463 Travel, Entertainment, Gift, and Car Expenses
 525 Taxable and Nontaxable Income
 529 Miscellaneous Deductions
 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
 538 Accounting Periods and Methods
 542 Corporations
 547 Casualties, Disasters, and Thefts
 583 Starting a Business and Keeping Records
 587 Business Use of Your Home
 925 Passive Activity and At-Risk Rules
 936 Home Mortgage Interest
Deduction

 946 How To Depreciate Property
Form (and Instructions)
 Schedule A (Form 1040): Itemized Deductions
 5213: Election To Postpone
Determination as To Whether the Presumption Applies That an
Activity Is Engaged in for Profit

See chapter 12 for information about getting publications and forms.
taxmap/pubs/p535-001.htm#en_us_publink1000208606

What Can I Deduct?(p3)

rule
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. 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.
Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. In some cases, you may not be allowed to deduct the expense at all. Therefore, it is important to distinguish usual business expenses from expenses that include the following.
taxmap/pubs/p535-001.htm#en_us_publink1000208607

Cost of Goods Sold(p3)

rule
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your business expenses may be included in figuring cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring cost of goods sold.
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
For more information, see the following sources.
taxmap/pubs/p535-001.htm#en_us_publink1000208608

Capital Expenses(p3)

rule
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called "capital expenses." Capital expenses are considered assets in your business. In general, you capitalize three types of costs.
Deposit
You can elect to deduct or amortize certain business start-up costs. See chapters 7 and 8.
taxmap/pubs/p535-001.htm#en_us_publink1000208610

Cost recovery.(p3)

rule
Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. These recovery methods allow you to deduct part of your cost each year. In this way, you are able to recover your capital expense. See Amortization (chapter 8) and Depletion (chapter 9) in this publication. A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. A greater portion of these costs can be deducted if the property is qualified disaster assistance property. See Pub. 946 for details.
taxmap/pubs/p535-001.htm#en_us_publink1000208611

Going Into Business(p3)

rule
The costs of getting started in business, before you actually begin business operations, are capital expenses. These costs may include expenses for advertising, travel, or wages for training employees.
taxmap/pubs/p535-001.htm#en_us_publink1000208612

If you go into business.(p3)

rule
When you go into business, treat all costs you had to get your business started as capital expenses.
Usually, you recover costs for a particular asset through depreciation. Generally, you cannot recover other costs until you sell the business or otherwise go out of business. However, you can choose to amortize certain costs for setting up your business. See Starting a Business in chapter 8 for more information on business start-up costs.
taxmap/pubs/p535-001.htm#en_us_publink1000208613

If your attempt to go into business is unsuccessful.(p3)

rule
If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories.
  1. The costs you had before making a decision to acquire or begin a specific business. These costs are personal and nondeductible. They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility.
  2. The costs you had in your attempt to acquire or begin a specific business. These costs are capital expenses and you can deduct them as a capital loss.
If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss.
The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. You cannot take a deduction for these costs. You will recover the costs of these assets when you dispose of them.
taxmap/pubs/p535-001.htm#en_us_publink1000208614

Business Assets(p3)

rule
There are many different kinds of business assets, for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. You must fully capitalize the cost of these assets, including freight and installation charges.
Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. See Regulations section 1.263A-2 for information on these rules.
taxmap/pubs/p535-001.htm#en_us_publink100075803

De Minimis Safe Harbor for Tangible Property(p3)

rule
Although you must generally capitalize costs to acquire or produce real or tangible personal property used in your trade or business, such as buildings, equipment, or furniture, you can elect to use a de minimis safe harbor to deduct the costs of some tangible property. Under the de minimis safe harbor for tangible property, you can deduct de minimis amounts paid to acquire or produce certain tangible business property if these amounts are deducted by you for financial accounting purposes or in keeping your books and records. See the following for the requirements for the de minimis safe harbor.
taxmap/pubs/p535-001.htm#en_us_publink100075804

You have an applicable financial statement.(p4)

rule
If you elect the de minimis safe harbor for the tax year, you can deduct amounts paid to acquire or produce certain tangible business property if:
taxmap/pubs/p535-001.htm#en_us_publink100075805

You do not have an applicable financial statement.(p4)

rule
If you elect the de minimis safe harbor for the tax year, you can deduct amounts paid to acquire or produce certain tangible business property if:
taxmap/pubs/p535-001.htm#en_us_publink100075806

How to make the de minimis safe harbor election.(p4)

rule
To elect the de minimis safe harbor for the tax year, attach a statement to the taxpayer’s timely filed original tax return (including extensions) for the tax year when qualifying amounts were paid. The statement must be titled "Section 1.263(a)-1(f) de minimis safe harbor election" and must include your name, address, taxpayer identification number (TIN), and a statement that you are making the de minimis safe harbor election under section 1.263(a)-1(f). In the case of a consolidated group filing a consolidated income tax return, the election is made for each member of the consolidated group.
In the case of a consolidated group filing a consolidated income tax return, the election is made for each member of the consolidated group. In the case of an S corporation or a partnership, the election is made by the S corporation or the partnership and not by the shareholders or partners. The election applies only for the tax year for which it is made.
taxmap/pubs/p535-001.htm#en_us_publink100075807

Example.(p4)

In 2017, you do not have an applicable financial statement and you purchase five laptop computers for use in your trade or business. You paid $2,000 each for a total cost of $10,000 and these amounts are substantiated in an invoice. You had an accounting procedure in place at the beginning of 2017 to expense the cost of tangible property if the property costs $2,000 or less. You treat each computer as an expense on your books and records for 2017 in accordance with this policy. If you elect the de minimis safe harbor in your tax returns for your 2017 tax year, you can deduct the cost of each $2,000 computer.
taxmap/pubs/p535-001.htm#en_us_publink1000208615

Improvements(p4)

rule
Generally, you must capitalize the costs of making improvements to a business asset if the improvements result in a betterment to the unit of property, restore the unit of property, or adapt the unit of property to a new or different use.
Some examples of improvements include rewiring or replumbing of a building, replacing an entire roof, increasing the production output of your equipment, putting an addition on your building, strengthening the foundation of a building so you can use it for a new purpose, or replacing a major component or substantial structural part of a machine.
However, you may currently deduct the costs of repairs or maintenance that do not improve a unit of property. This generally includes the costs of routine repairs and maintenance to your property that result from your use of the property and that keep your properly in an ordinary efficient operating condition. For example, deductible repairs include costs such as painting exteriors or interiors of business buildings, repairing broken window panes, replacing worn-out minor parts, sealing cracks and leaks, and changing oil or other fluids to maintain business equipment.
taxmap/pubs/p535-001.htm#en_us_publink100075808

Routine maintenance safe harbor.(p4)

rule
If you determine that your cost was for an improvement to a building or equipment, you can deduct your cost under the routine maintenance safe harbor. Under the routine maintenance safe harbor, you can deduct the costs of an improvement that meets all of the following criteria.
taxmap/pubs/p535-001.htm#en_us_publink100075809

Costs incurred during an improvement.(p4)

rule
You must capitalize both the direct and indirect costs of an improvement. Indirect costs include repairs and other expenses that directly benefit or are incurred by reason of your improvement. For example, if you improve the electrical system in your building, you must also capitalize the costs of repairing the holes that you made in walls to install the new wiring. This rule applies even if this work, performed by itself, would otherwise be treated as currently deductible repair costs.
taxmap/pubs/p535-001.htm#en_us_publink100075810

Election to capitalize repair and maintenance costs.(p4)

rule
You can elect to capitalize and depreciate certain amounts paid for repair and maintenance of tangible property, even if they do not improve your property. To qualify for this election, you must treat these amounts as capital expenditures on your books and records used in computing your income. If you make this election, you must apply it to all repair and maintenance costs of tangible property that you treat as capital expenditures on your books and records for this tax year. To make the election to treat repairs and maintenance as capital expenditures, attach a statement titled "Section 1.263(a)-3(n) Election" to your timely filed original tax return (including extensions) and include your name and address, TIN, and a statement that you elect to capitalize repair and maintenance costs under section 1.263(a)-3(n). You must treat these amounts as improvements to your tangible property and begin to depreciate these amounts when the improvement is placed in service.
taxmap/pubs/p535-001.htm#en_us_publink1000208617

Capital Versus Deductible Expenses(p4)

rule
To help you distinguish between capital and deductible expenses, different examples are given below.
taxmap/pubs/p535-001.htm#en_us_publink1000208618

Motor vehicles.(p4)

rule
You usually capitalize the cost of a motor vehicle you use in your business. You can recover its cost through annual deductions for depreciation.
There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. See Pub. 463 for more information.
Generally, repairs you make to your business vehicle are currently deductible. However, amounts you pay to improve your business vehicle are generally capital expenditures and are recovered through depreciation.
taxmap/pubs/p535-001.htm#en_us_publink1000208619

Roads and driveways.(p4)

rule
The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. The cost of maintaining a private road on your business property is a deductible expense.
taxmap/pubs/p535-001.htm#en_us_publink1000208620

Tools.(p4)

rule
Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or they cost $200 or less per item or invoice.
taxmap/pubs/p535-001.htm#en_us_publink1000208621

Machinery parts.(p5)

rule
Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not to improve the machine, is a deductible expense.
taxmap/pubs/p535-001.htm#en_us_publink1000208622

Heating equipment.(p5)

rule
The cost of changing from one heating system to another is a capital expense.
taxmap/pubs/p535-001.htm#en_us_publink1000208623

Personal Versus Business Expenses(p5)

rule
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 the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and generally is not deductible. See chapter 4 for information on deducting interest and the allocation rules.
taxmap/pubs/p535-001.htm#en_us_publink1000208624

Business use of your home.(p5)

rule
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.
To qualify to claim expenses for the business use of your home, you must meet both of the following tests.
  1. The business part of your home must be used exclusively and regularly for your trade or business.
  2. The business part of your home must be:
    1. Your principal place of business; or
    2. A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or
    3. A separate structure (not attached to your home) used in connection with your trade or business.
You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility.
Your home office qualifies as your principal place of business if you meet the following requirements.
If you have more than one business location, determine your principal place of business based on the following factors.
taxmap/pubs/p535-001.htm#en_us_publink1000312995
Optional safe harbor method.(p5)
Individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. This method is an alternative to the calculation, allocation, and substantiation of actual expenses.
The deduction under the optional method is limited to $1,500 per year based on $5 per square foot for up to 300 square feet. Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). You are not required to allocate these deductions between personal and business use, as is required under the regular method. If you use the optional method, you cannot depreciate the portion of your home used in a trade or business.
Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. All of the requirements discussed earlier under Business use of your home still apply.
For more information on the deduction for business use of your home, including the optional safe harbor method, see Pub. 587.
EIC
If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997.
taxmap/pubs/p535-001.htm#en_us_publink1000208625

Business use of your car.(p5)

rule
If you use your car exclusively in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible.
You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. For 2017, the standard mileage rate is 53.5 cents per mile. Beginning in 2018, the standard mileage rate increases to 54.5 cents per mile.
If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.
For more information on car expenses and the rules for using the standard mileage rate, see Pub. 463.