what are business expenses 
business expenses are costs incurred in the ordinary course of business every business from the smallest corner store to the largest corporation tracks these expenses throughout the year for tax purposes business expenses are subtracted from revenue to arrive at a company s taxable net income business expenses are also referred to as deductions these are generally divided into two major categories capital expenditures and operational expenditures understanding business expensessection 162 of the internal revenue code irc details the guidelines for business expenses the irc allows businesses to report any expense that may be ordinary and necessary 1business expenses need not be required to be considered ordinary or necessary generally ordinary means that the expense is common in the industry and most business owners in the same line of business or trade would normally expense these things necessary means that the expenses are appropriate and a business owner might not be able to manage without making the expenditure 2an expense that meets the definition of ordinary and necessary for business purposes can be expensed and therefore is tax deductible some business expenses may be fully deductible while others are only partially deductible below are some examples of fully deductible expenses income statement reportingthe income statement is the primary financial statement used by businesses to record their expenses and determine their taxes most have three categories of expenses broken down by direct costs indirect costs and interest the value of inventory on hand at the beginning and the end of each tax year is used in determining the cost of goods sold cogs which is a large direct expense for many companies cogs is deducted from an entity s total revenue to determine gross profit for the year any expenses included in cogs cannot be deducted again expenses that are included in calculating cogs may include direct labor costs factory overhead storage costs of products and costs of raw materials 2indirect costs are subtracted from gross profit to identify operating profit typical indirect costs include executive compensation general expenses depreciation and marketing costs subtracting indirect costs from gross profit results in operating profit which is also known as earnings before interest and tax 4expensing of business assets is usually done by depreciation depreciation is a tax deductible expense on the income statement and is classified as an indirect expense depreciation expenses can be deducted over a number of years they typically include the costs of computers furniture property equipment trucks and more 5the irs places limits on costs associated with gifts meals and entertainment for example you can usually deduct 50 of the cost of providing meals to employees although certain meals may be fully deducted 6the last section of the income statement involves expenses for interest and tax interest is the last expense a company subtracts to arrive at its taxable income sometimes called adjusted taxable income personal expensesin some cases expenses incurred by a business owner may be both personal and business related for example a small business owner might use the same car for personal purposes and business related activities in this case the portion of miles used for business purposes can be deducted in the case of home offices costs associated with the portion of the home that is exclusively used for business are generally deductible 7non deductible expensessome expenses incurred by a business are not reportable these expenses include bribes lobbying costs penalties fines and contributions made to political parties or candidates 8