IRS Publication 535: A guide for small businesses

If you're not aware of all the deductions and write-offs available to you as a small business owner, you may be overpaying on taxes. Learning how to deduct the correct business expenses can help you reduce your annual tax liability and keep more of your business income.

You can use IRS Publication 535 as a resource to learn about the most common business tax deductions and avoid the consequences of incorrectly deducting expenses.

What is IRS Publication 535?

IRS Publication 535 is a tax guidance document specifically for businesses, including partnerships, sole proprietorships, or self-employed individuals. It covers what expenses can be deducted, how to do so, and which records to keep to be fully compliant with IRS rules.

If you're a sole proprietor, you'll typically report these expenses on Schedule C, which you file along with your personal income tax return (Form 1040). The business expense categories covered by Publication 535 are the costs you incur from running your business.

Is Publication 535 still in use?

The IRS discontinued Publication 535 after the 2022 tax year and provides a list of publications that have since superseded it. However, Pub 535 is still accessible on the web and provides helpful information about what expenses are deductible and how to deduct them.

The discontinuation was part of a broader IRS effort to consolidate redundant publications. The 2022 edition, covering tax year 2022, was the final version published.

While the document itself is archived, the underlying tax rules it described remain in effect. They're just covered by other, more current publications now.

Before filing your taxes, always check the latest IRS updates for the most accurate information. You may also consult a tax professional who will be up to date on current IRS rules and changes.

What replaced IRS Publication 535?

The IRS didn't issue a single replacement for Publication 535. Instead, the topics it formerly covered were redistributed across several current publications and online resources.

The key replacement publications include:

• Publication 334 (Tax Guide for Small Business): The closest current equivalent to Pub 535, covering filing requirements, deductions, and payment options for small businesses
• Publication 463 (Travel, Gift, and Car Expenses): Covers travel, gift, and vehicle expense deductions that were previously addressed in Pub 535
• Publication 525 (Taxable and Nontaxable Income): Addresses income classification topics that overlapped with Pub 535's deduction guidance
• Instructions for Schedule C (Form 1040): Provides line-by-line guidance for reporting business income and expenses

The IRS website (irs.gov) also hosts topic-specific pages covering business expenses, depreciation, and deductions that were previously consolidated in Pub 535. The underlying rules haven't changed, only the packaging of the guidance has shifted.

How is Publication 535 different from other IRS publications?

IRS Publication 535 covered general business expenses and served as a broad overview of deductible expenses for businesses. These four current IRS publications are more specific and will help round out the information you need to correctly file your taxes.

Publication 334

Publication 334, Tax Guide for Small Business, is the closest current equivalent to Pub 535 for small businesses. It covers topics from filing requirements to payment options and includes current information on what expenses can be deducted.

Publication 463

It's common to misstate or incorrectly deduct expenses for travel, entertainment, and gifts. Publication 463, Travel, Gift, and Car Expenses, provides guidance on how to handle these categories correctly and is especially useful if you have employees who travel.

Publication 525

Publication 525, Taxable and Nontaxable Income, focuses on the income side of the equation. It details the different types of taxable and nontaxable income, including how to calculate taxes on certain types of income like pensions and insurance proceeds.

Publication 529

Publication 529, Miscellaneous Deductions, covers deductions that don't fit neatly into other categories, such as certain fines and penalties, gambling losses, and certain work-related expenses. Most of these items must meet specific requirements to be deductible.

What expenses can I deduct?

First, to deduct any business expense, it must be ordinary and necessary, which means:

• The expense is common or ordinary for your industry
• The expense is necessary to operate in your industry, even if it's not indispensable

For example, rent is a necessary expense you can deduct from your taxes. However, if you rent your home and use it for business purposes, you can only deduct the portion of rent that is attributable to business use of your home, not the portion that's for personal use.

You must allocate expenses such as rent, utilities, and insurance based on the percentage of your home used exclusively for business.

While charitable contributions may be deductible, they are generally not considered business expenses unless made by a corporation. Sole proprietors typically deduct these on their personal return, not their business return, so check IRS guidelines carefully to avoid misclassifying them.

Can I deduct capital expenses?

You can deduct costs such as rent immediately, while you'd typically deduct capital expenses over a longer period of time.

For example, business assets such as machinery or real estate are deductible but are subject to capitalization and depreciation. This means you can't deduct the cost when you incur it, but you can deduct it over time as you depreciate property using IRS-approved schedules.

In addition to depreciation, businesses involved in extracting natural resources (timber, oil, or minerals) may also qualify for depletion deductions, which allow you to recover the cost of those resources over time.

If, after reviewing IRS publications, you have doubts about whether your expenses are ordinary and necessary or whether they must be capitalized, consider consulting a tax professional.

There's one practical shortcut worth knowing: the de minimis safe harbor election. You can elect to deduct certain capital items that cost $2,500 or less per item (or $5,000 if your business has audited financial statements) as expenses in the current year rather than capitalizing and depreciating them. This simplifies accounting for smaller purchases like laptops, office furniture, or tools.

Cash vs. accrual accounting

Your method of accounting, whether cash or accrual, also determines when and how you can deduct certain expenses.

With the cash method, you can only deduct expenses when you pay them. Under the accrual method, you can deduct expenses when you've incurred them and are legally obligated to pay, even if you haven't actually paid yet.

Say you order $3,000 of office supplies in December but don't pay the invoice until January. Under cash accounting, you'd deduct that expense in January (when you pay). Under accrual accounting, you'd deduct it in December (when you received the supplies and became obligated to pay). The timing difference can affect which tax year absorbs the deduction, which matters if your income varies year to year.

Publication 535 and Publication 334 provide further guidance on which expenses you can deduct under each method. Your accountant can also help you determine which accounting method is best for your business.

Most common deductible business expenses

Some taxes you pay, such as excise taxes on fuel or heavy vehicle use, may also be deductible depending on your industry and usage. The list of items that qualify for deduction is long, but here are some highlights.

• Raw materials
• Storage
• Repairs and maintenance
• Transportation and car expenses
• Utilities
• Business interest
• Partial self-employment tax
• Some property taxes
• Employees' pay
• Rent
• Insurance premiums
• Advertising and marketing
• Office expenses
• Supplies
• Travel expenses

One major category of deductible expenses is the cost of goods sold (COGS), which includes the direct costs associated with producing or purchasing the products you sell. You typically subtract this amount from your gross receipts to calculate gross profit.

Employee wages must be reported on Form W-2 to qualify as a deductible payroll expense.

Consult IRS Publication 334 for the full current list of allowable deductions and instructions on how to deduct them.

Key deductible areas

A few key categories include some of the most common small business deductions:

Startup costs

Business startup expenses can provide valuable tax benefits when you know how to claim them properly.

The IRS allows you to deduct up to $5,000 in startup costs during your first year, with remaining amounts spread over 15 years. This deduction phases out dollar-for-dollar once startup costs exceed $50,000, so timing your business launch can affect your tax savings.

Some startup costs may also be subject to amortization, meaning they're deducted gradually over several years instead of all at once.

Home office expenses

Your home office can generate significant deductions if it meets specific IRS requirements.

You can choose between two calculation methods. The simplified method allows $5 per square foot up to 300 square feet, while the regular method is based on the percentage of square footage of your home used by your business. The regular method requires detailed expense tracking but often yields larger deductions for businesses with substantial home office costs.

Meals and entertainment

Business dining and entertainment expenses follow specific rules that have evolved considerably in recent years.

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the deduction related to entertainment, amusement, or recreation expenses. Many TCJA provisions were set to expire at the end of 2025, so check current IRS guidance for the latest status on entertainment and meal deductions.

Business bad debts

Unpaid customer invoices can sometimes provide tax relief through bad debt deductions.

You must have already included the income in your taxable earnings and made reasonable collection efforts. Document your attempts to collect payment, then write off the debt in the year it becomes worthless. Bad debt is non-deductible for taxpayers who use cash-basis accounting since they never reported the income.

The IRS distinguishes between two types of bad debt. Wholly worthless debts are fully uncollectible, and you can deduct the entire amount in the year the debt becomes worthless.

Partially worthless debts are cases where some portion may still be recoverable, and you can deduct only the portion you can prove is worthless. The IRS treats these differently on your return, so proper classification matters.

The IRS expects you to demonstrate three things: the debt was legitimate (a real business transaction, not a gift), you made reasonable collection efforts (demand letters, phone calls, or use of a collection agency), and the debt is genuinely worthless (the debtor is bankrupt, deceased, or otherwise unable to pay). Keep dated records of every collection attempt.

How the Tax Cuts and Jobs Act affects business deductions

The Tax Cuts and Jobs Act (TCJA) of 2017 overhauled how businesses handle deductions. Many of its provisions were set to expire at the end of 2025, which may affect your deduction strategy. Check current IRS guidance to confirm which provisions are still in effect.

Key TCJA changes affecting business deductions:

• Entertainment expenses: No longer deductible. Business meals remain 50% deductible with proper documentation.
• Bonus depreciation: Allows you to immediately deduct a percentage of the cost of qualifying assets. The rate has been phasing down: 100% through 2022, 80% in 2023, and 60% in 2024. Check the IRS for current rates.
• Section 199A qualified business income (QBI) deduction: If you operate a pass-through business (sole proprietorship, partnership, or S corp), you can deduct up to 20% of qualified business income, subject to income thresholds and limitations
• Net operating loss (NOL) changes: NOLs can offset up to 80% of taxable income (previously 100%) and can no longer be carried back, only carried forward
• Business interest deduction limits: Businesses with average annual gross receipts over $29 million (adjusted for inflation) face limits on how much interest they can deduct

Several of these TCJA provisions were scheduled to sunset after 2025. Congress may have extended, modified, or allowed them to expire. Consult a tax professional or review the latest IRS guidance to plan for any changes to your deduction strategy.

Staying compliant with IRS guidelines

Proper documentation separates legitimate business deductions from potential audit headaches. Keep detailed records that clearly show the business purpose, amount, date, and parties involved for each expense. Expense receipts, invoices, bank statements, and credit card records form the foundation of your documentation system.

Store physical receipts in organized files and consider digital backup copies. For meals and entertainment, note the business relationship of attendees and discussion topics. Travel expenses require additional details, such as destination, date, and business purpose.

Mileage logs should include starting point, destination, odometer readings, and business reason for each trip. You can then calculate your vehicle-related deduction using either actual costs or the standard mileage rate, which the IRS updates annually.

Make sure you understand the IRS receipt requirements for your situation. Generally, you need receipts for any single expense of $75 or more, and you should keep records for at least 3 years from the date you filed the return claiming the deduction.

Tax laws change frequently, and individual circumstances vary significantly. It's worth repeating that IRS Pub 535 has been discontinued as of the 2022 tax year. Review current IRS publications or consult a qualified tax professional before making deduction decisions that could affect your tax liability.

Consequences of incorrect write-offs

One of the most important things to remember when deducting expenses is that they must be legitimate business expenses. If you try to deduct personal expenses or exaggerate the amount of an expense, you could face severe consequences, including audits and penalties.

The IRS can disallow deductions they deem to be improper. This means you can't deduct the expense on your tax return. They can also assess penalties and interest on unpaid federal tax owed due to incorrect or disallowed deductions. The IRS may even pursue criminal charges, though this is typically reserved for cases of tax fraud, which is defined as willfully attempting to evade taxes.

Even if you can take an expense deduction, you must still keep records to prove the business nature of the expense. This is typically done by keeping receipts or invoices. Receipt and invoice tracking can quickly become a thorn in your side, so automating or digitizing the process is the way to go.

If you can't provide documentation for an expense, the IRS may disallow the deduction. Keep good records and speak with a tax professional if you have any questions about deductions.

Automate tax-deductible expense tracking with Ramp

Tracking deductible expenses doesn't have to mean chasing receipts and sorting spreadsheets. Ramp's accounting automation software removes the manual work by automatically coding transactions, matching receipts, and organizing expenses so you're always audit-ready.

Ramp's AI learns your accounting patterns and codes every transaction across all required fields in real time. You can customize coding rules to match your tax strategy, ensuring meals, travel, software subscriptions, and other deductible expenses land in the right categories automatically. When receipts are missing or context is unclear, Ramp flags transactions for review and requests documentation from employees directly, so nothing slips through the cracks.

Here's how Ramp keeps your deductions organized and compliant:

• AI codes transactions instantly: Ramp applies your feedback to code spend across custom fields as transactions post, so deductible expenses are categorized correctly from day one
• Auto-match receipts: Ramp collects and matches receipts to transactions automatically, eliminating manual follow-up and ensuring you have the documentation the IRS requires
• Policy Agent enforces your rules: Ramp's Policy Agent, an always-on AI reviewer trained on your company's actual expense policy, catches out-of-policy spend automatically so non-deductible expenses are flagged before they reach your books
• Generate audit-ready reports: Pull detailed reports filtered by category, department, or time period to support your tax filings with complete documentation

Try an interactive demo to see how Ramp helps you maximize deductions while staying IRS-compliant.