Business Deductions

EA Part 2 — Business Deductions Exam: IRS Enrolled Agent — Part 2: Businesses Last Updated: June 2026 --- ## Ordinary and Necessary Standard — §162 All ordinary and necessary business expenses are deductible: - Ordinary: Common and accepted in the trade or business - Necessary: Appropriate and helpful (not required to be indispensable) Taxpayer's trade or business: Distinguished from investment activities. Employee expenses, SE expenses, and business entity expenses all qualify. --- ## Key Business Deductions ### Compensation Expenses Reasonable compensation: Wages, salaries, bonuses deductible if reasonable in amount and paid for services rendered. IRS scrutiny: Compensation to owner-employees of closely held corporations — is it wages or a disguised dividend? Dividends are not deductible; reasonable wages are. Deferred compensation: Nonqualified plans generally deductible when the employee includes in income (§404(a)(5)). ### Rent Expense Deductible: Rent paid for business property (office, equipment). Not deductible: Rent paid to acquire ownership; rent between related parties must be at arm's length. Lease vs. purchase: IRS may recharacterize certain leases as purchases (economic substance). ### Business Insurance Deductible: Premiums for business-related insurance (liability, property, workers' comp, business interruption). Not deductible: Life insurance on employees where the business is the beneficiary (§264). ### Interest Expense Business interest: Generally deductible under §163. Business Interest Limitation (§163(j)): For businesses with gross receipts > $30M (3-year average), deduction limited to: `` Adjusted taxable income (ATI) × 30% + business interest income + floor plan financing `` Disallowed interest carries forward indefinitely. Small business exception: Gross receipts ≤ $30M average → §163(j) doesn't apply. --- ## Meals, Entertainment, and Travel ### Meals 50% deductible: Ordinary and necessary business meals (with client, employee, or business discussion). 100% deductible…