As put down by the relevant legislation, any expense incurred for the business, which is ordinary in nature and is an essential cost component, comes under the purview of deductible items. The Internal Revenue Service (IRS) defines the scope as:
To be included among tax-deductible items, 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.
When filing tax returns, there are certain specific categories of expenses that come under the scope of deductibles. When we call these expenses ordinary and necessary, we say so in context of a specific business or profession. For instance, while spare parts and lubricants would be considered as ordinary and necessary for an automobile repair shop, similarly, stationery, an Internet connection, and various writing, editing, and plagiarism software would constitute as ordinary and necessary for an author or writer. Therefore, the items falling under each category would differ from business to business.
Certain seemingly unusual disbursements may also be included within the scope of deductible items if they are regularly incurred by a business as part of their usual course. For instance, client entertainment is a commonly incurred expense, hence, it can be deemed as tax-deductible.
The following list includes some general items which, more or less, are incurred by most businesses in their usual course.
Fully Deductible Expenses
The complete amounts of these items are deductible while filing tax returns:
- Legal fees
- Printing, copying, and office stationery
- Professional and consultation fees
- Postage and courier
- Magazines, circulars, and professional journals' subscription fees
- Dues and accounts payable
- Expenses incurred in lieu of organizational training and development programs
- Transport and delivery charges
- Business travel expenses
- Bank charges
- Repairs and maintenance
- Accounting fees and maintenance costs (stationery, software, etc.)
- Office/operational/administrative utilities such as electricity, sanitation, security, etc.
- Salaries, wages, and various other financial compensation to employees
- Telephone connections
- Internet service, domain name, website maintenance, hosting, etc.
- Commissions and charges incurred for marketing and selling the products or services
- Rental charges for equipment, land, buildings, premises, etc.
- Compensation paid to contract labor
- Manufacturing overheads
- Interest and insurance premiums
- Trade discounts
- Credits extended and costs incurred on collection
- Purchase and renewal of licenses
Partially Deductible Expenses
These items are deductible from tax returns up to a certain pecuniary limit:
- Meals, snacks, and entertainment (to be proportionally divided between personal and business use)
- Home office expenses (to be proportionally divided between personal and business use)
- Gifts (up to the value of USD 25 per individual)
- Automobile expenses (to be proportionally divided between personal and business use)
Apart from these categories, there are certain other costs or charges that can be incurred by a business to further its cause. Most of these expenses are either illegal, personal in nature, or are incurred as a result of some misdemeanor, penalty, or any other legal infringement. They include donations to political parties, payment of bribes, penalties, and fees for lobbying. Subscriptions and fees paid for social club memberships are also included under nondeductible items.