Why can one business deduct an expense that another taxpayer cannot?

Question

AcadiFi · Accepted Answer

Deductibility depends on facts, not labels. A business expense generally must be ordinary, necessary, paid or incurred in the trade or business, and properly substantiated. Two taxpayers can buy the same item and get different tax results because one use is business and the other is personal.

Suppose Willow Creek Design buys a $1,200 camera used only for client product photos. That may be a business asset or expense depending on capitalization rules. If the owner buys the same camera for a family vacation and occasionally posts business content, the deductible portion is much weaker and may require allocation. The same idea applies to meals, vehicles, phones, and home office costs.

The EA exam often tests substantiation. Mileage logs, receipts, business purpose notes, and exclusive-use tests matter. The fact that another taxpayer "got away with it" is not authority. An EA should explain risk, document the client's facts, and claim only supportable amounts.

Practical rule: ask what business activity the expense supports, how much is personal, and what record proves it. If those questions cannot be answered, the deduction may not survive examination. For exam purposes, identify the taxpayer type, governing rule, required documentation, timing issue, penalty exposure, and next procedural step before choosing an answer. Practice more in our EA question bank.

Why can one business deduct an expense that another taxpayer cannot?

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