How do I evaluate whether a business expense is really deductible?

Question

AcadiFi · Accepted Answer

Start with the ordinary-and-necessary standard, then test business purpose, substantiation, and any specific limitation. A business label...

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At fictional Harbor Thread Studio, the owner wants to deduct a weekend resort trip because she handed out three business cards. The enrolled agent should ask what business activity occurred, whether the trip was primarily business or personal, what records exist, and whether travel, meals, or entertainment limitations apply.

```mermaid
flowchart TD
  A[Expense] --> B[Ordinary and necessary?]
  B --> C[Business purpose?]
  C --> D[Substantiated?]
  D --> E[Specific limitation?]
  E --> F[Deduct, limit, or deny]
```

Substantiation matters. Receipts alone prove payment, not business purpose. A calendar, mileage log, client agenda, invoice, or contemporaneous note can explain why the expense relates to the business.

For exam questions, watch for mixed-use property, travel, meals, home office, vehicle expenses, startup costs, and hobby-loss issues. The correct answer often denies or limits a deduction even when cash was spent.

The safe professional habit is to ask: would this expense make business sense if no tax deduction existed? If not, examine it carefully. Practice more in our EA Part 2 question bank.

How do I evaluate whether a business expense is really deductible?

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