What are "deductible business expenses"?

Deductible business expenses refer to those costs that are both ordinary and necessary for a business to operate and generate income. These expenses are subtracted from gross income to arrive at taxable income, thereby reducing the overall tax burden of the business. The Internal Revenue Service (IRS) defines an expense as being ordinary if it is common and accepted in the industry, and necessary if it is helpful and appropriate for the business.

For example, costs such as rent, utilities, wages, and supplies are typical deductible business expenses because they directly contribute to the functioning of the business. By allowing businesses to deduct these expenses, the tax system aims to ensure that businesses are taxed only on their true profits rather than on their total revenues, thus encouraging economic activity and growth.

Other options do not encompass the full scope of what constitutes deductible business expenses. For instance, expenses that must be paid to employees, while necessary for the operation of a business, only represent one category of deductible expenses and do not capture the broader definition. Similarly, expenditures that guarantee tax refunds or costs associated solely with asset acquisition do not meet the criteria outlined by the IRS for deductibility in relation to everyday business operations and cash flow.