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Video: IRS Rules for Reasonable Business Expenses

Updated for Tax Year 2021 • September 13, 2022 02:34 PM


You can only deduct business expenses on your income taxes that the IRS deems "reasonable."


Video transcript:

Hello, I'm Sara from TurboTax with important news about your business deductions.

With all the different business expenses you pay, have you ever wondered which amounts are reasonable to deduct? Well, as broad as the term reasonable may be, there are some simple rules you can follow to make completing your business tax return a little less confusing.

A general guideline you should follow is that a reasonable business expense must be ordinary and necessary. You may think this is too vague, but it may actually be to your benefit.

When you think to yourself whether your expense is ordinary, you should ask the question would a similar business incur this type of expense during the year. If the answer is yes, then the expense is most likely ordinary.

Many business owners think that necessary mean the expenses required. But this is not true at all. For the expense to be necessary, it just needs to be helpful to your business in some way.

In some situations the IRS will decide what is reasonable for you. For example, footing the bill to take a perspective client to dinner is ordinary and necessary since it may enhance your business. But the IRS typically still limits these deductions to 50 percent of the cost that is not extravagant or overly luxurious. In a sense, the IRS is telling you that only 50 percent is reasonable.

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