Section 162 allows deductions for ordinary and necessary business expenses paid or incurred during the year. These include reasonable compensation, travel away from home, and rent for property used in business.
Start‑Up & Organizational Costs
Start‑up and organizational costs are capital expenses, but a business may elect to deduct:
- Up to $5,000 of start‑up costs
- Up to $5,000 of organizational costs
The deduction phases out when costs exceed $50,000. Remaining amounts are amortized over 180 months.
Start‑Up Costs Include:
- Market analysis
- Opening advertisements
- Training wages
- Travel to secure suppliers or customers
- Professional fees
Organizational Costs Include:
- Temporary directors
- Organizational meetings
- State filing fees
- Legal and accounting fees
Not included: stock issuance costs, asset acquisition costs.
Election is made on the first return; amortization requires Form 4562.
Business Gifts
Deduction limit: $25 per recipient per year. Incidental costs (wrapping, engraving) are excluded if they don’t add substantial value.
Not considered gifts:
- Items costing $4 or less with permanent business branding
- Promotional materials used on the recipient’s premises
Rent & Leased Property
Rent is deductible only when:
- Paid for business use
- No equity or title is acquired
- Amount is reasonable
Lease acquisition costs are amortized over the lease term. Improvements to leased property are depreciated under MACRS.
Interest Expense
Business interest is deductible if:
- Taxpayer is legally liable
- True debtor‑creditor relationship exists
- Loan proceeds are used for business
UNICAP rules require capitalization of interest for producing real or certain tangible property.
Business Interest Limitation
Deduction limited to:
- Business interest income
- 30% of adjusted taxable income
- Floor plan financing interest
Disallowed interest carries forward indefinitely. Small businesses meeting the §448(c) gross receipts test are exempt.
Insurance Premiums
Deductible business insurance includes:
- Property, liability, malpractice
- Workers’ compensation
- Health insurance for employees
- Business interruption insurance
Not deductible:
- Self‑insurance reserves
- Policies covering lost earnings
- Certain life insurance where the business is beneficiary
Keyman life insurance premiums are not deductible; proceeds are tax‑free.
Self‑Employed Health Insurance
Deductible for:
- Self‑employed individuals
- Partners
- 2% S‑corp shareholders
Policy must be established under the business.
Travel Expenses
A taxpayer is “away from home” when duties require overnight rest. Deductible travel includes:
- Transportation
- Lodging
- Business calls
- Laundry
- 50% of meals (not lavish)
U.S. Travel
- Entirely business: fully deductible
- Primarily business: deduct business portion
- Primarily personal: only business‑related expenses deductible
Foreign Travel
100% deductible if:
- No substantial control over trip
- Trip is ≤ 1 week
- < 25% of time is personal
- Personal vacation not a major factor
Otherwise, allocate between business and personal.
Automobile Expenses
Two methods:
- Actual expenses (depreciation, gas, repairs, insurance)
- Standard mileage rate: 70¢ per mile (2025)
Standard mileage must be used in the first year the vehicle is placed in service. Not allowed after bonus depreciation or §179.
Parking, tolls, and business‑portion interest are deductible under either method.
Meals & Entertainment
Entertainment expenses are not deductible.
Meals are 50% deductible if:
- Ordinary and necessary
- Not lavish
- Taxpayer is present
- Provided to a business contact
- Separately stated from entertainment costs
Demolition Expenses
Demolition costs and the remaining basis of demolished structures are not deductible. They must be capitalized into the basis of the land, not expensed.
Club Dues & Membership Fees
Dues paid to clubs organized for business, pleasure, recreation, or social purposes are not deductible. This includes:
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Country clubs
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Golf clubs
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Athletic clubs
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Social clubs
Exceptions: Dues to the following are deductible:
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Chambers of commerce
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Boards of trade
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Business leagues
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Professional associations
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Trade associations