September 19, 2022
Explainer

A guide to IRS Publication 535 for your business in 2023

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If you're unaware of the deductions and write-offs available to you as a small business owner, then you may be overpaying your taxes every year. Learning how to do small business taxes will empower you as a business owner.

You can use IRS Publication 535 to learn about some of the most common write-offs and avoid the consequences of incorrectly deducting expenses. By understanding which expenses are deductible, you can save your business money come tax time. In this article, we’ll dive into IRS publication 535 and explain how you can leverage these guidelines as a small business owner to save money every year to reinvest in your growth. 

What is IRS Publication 535?

IRS Publication 535 is a tax guidance document specifically for businesses. It covers what expenses can be deducted, how to do so, and which records to keep to be fully compliant.

This publication is essential for you as a business owner to ensure that you cover all of the deductions to which you are entitled. It will also help you remain compliant with all tax laws by taking a closer look at some of the most common deductions available to you.

The business expenses covered by Publication 535 are the costs you incur from running your business, including billable expense income that can easily be missed. Some costs may be deducted while others must be capitalized. The distinction between the two is important to understand because not every expense can be written off immediately.

To deduct any business expense, it must meet two criteria:

  • The expense must be considered necessary and reasonable to conduct business.
  • The expense must not be regarded as a personal expense.

For example, rent is an expense that can be deducted from your taxes. However, if you rent your home and use it for business purposes, you can only deduct a portion of the rent that is attributable to the business. On the other hand, business assets like machinery are considered capitalizable expenses. This means that you can't deduct the cost when you incur it, but you can deduct it over a period of time through depreciation.

While the IRS provides a baseline for what is considered a deductible business expense, your accounting method, cash or accrual, will also affect how and when you can deduct your expenses. 

With the cash method, you can only deduct expenses when they are paid. Under the accrual method, you can deduct expenses when the all-events test has been satisfied or when economic performance occurs. Publication 535 provides further guidance on which expenses can be deducted under each method.

How is Publication 535 different from other IRS publications?

IRS Publication 535 differs from other publications because it covers general business expenses. It can be used as a broad overview of deductible expenses for businesses.

There are other areas of the tax code that you need to know as a small business owner. These four IRS publications are more specific and will help round out the information that you need to correctly handle your tax filings.

Publication 463

Small business tax deductions that individuals and organizations can take for travel, entertainment, and gifts are often misstated or incorrectly deducted, so this publication guides how to do it correctly.

Publication 334

This tax guide is specifically for small businesses. It covers topics from filing requirements to payment options. It also includes information on what expenses can be deducted.

Publication 525

The types of taxable and nontaxable incomes and calculating taxes on certain types of income, such as pensions and insurance proceeds, are detailed here.

Publication 529

Miscellaneous deductions, like job-related and hobby expenses, are explained in Publication 529. However, small businesses can no longer claim miscellaneous itemized deductions unless they meet certain requirements.

Most common 535 business expenses

The list of items that qualify for deduction is long, but this list includes the most common expenses businesses can deduct. To get the full list, please consult IRS Publication 535.

  • Raw materials
  • Storage
  • Repair and maintenance
  • Transportation
  • Utilities
  • Interest
  • Taxes
  • Bad debts
  • Wages and salaries
  • Rent
  • Insurance
  • Advertising
  • Office expenses
  • Supplies
  • Travel expenses
  • Meals and entertainment

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 penalties and audits. Consider how to reduce operational costs if you find that your business is spending more than it should.

The IRS can disallow deductions that they deem to be improper. This means you cannot deduct the expense on your tax return. Additionally, the IRS can assess penalties and interest on the amount of taxes you owe.

In some cases, the IRS may even pursue criminal charges. This is typically reserved for cases of tax fraud, which is defined as willfully attempting to evade taxes.

It is important to note that even if you can deduct an expense, you must still keep records to prove the business nature of the expense. This is typically done by keeping receipts or invoices. That said, receipt and invoice tracking can quickly become a thorn in the side of small businesses, so this is best left to automation or digitization—more on this below. 

If you cannot 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 deducting expenses.

If you still think that something is questionable as a deduction, consider leaving it off your return. It may be better than incorrectly writing off an expense.

How Ramp can help you automatically track and categorize expenses to make tax write-offs easier

Track business expenses using a tool like Ramp, which offers expense management software that also helps you categorize and automate your expenses, manage invoices, and pay bills. The software also makes it easy to generate reports. This can save you significantly when it comes to preparing for tax season.

With seamless accounting capabilities, you'll be able to track every dollar spent in real time to identify write-offs and maximize deductions. Plus, you'll never have to worry about being compliant or losing receipts again.

If you're looking for an easier way to manage your business expenses, Ramp is the perfect solution.

Learn how Ramp strengthens your finances

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FAQs
What is the difference between a tax deduction and a tax credit?

A tax deduction reduces the amount of income that is subject to taxation. A tax credit, on the other hand, reduces the amount of taxes that you owe. Not all businesses may qualify for tax credits, so it's essential to consult with a tax professional to see if your business is eligible.

What is the difference between an employee expense and a business expense?

An employee expense is one that an employee incurs while performing their job. A business expense is something that a business incurs in the course of operating. While companies can deduct both, different rules apply to each.

How can Ramp help with business expenses?

Business expense categories can be difficult to track, but Ramp can help. By matching receipts and invoices to business transactions, Ramp can categorize your expenses to track spending, identify write-offs, and get a headstart on tax season.

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