Thankfully, you can reduce your tax burden by deducting most of what you spend in the course of business.

How tax savvy a businessperson you are has a great effect on how much money is in your pocket at the end of the year. You probably know that the tax code allows you to deduct costs of doing business from your gross income. What you are left with is your net business profit. This is the amount that gets taxed.

So knowing how to maximize your deductible business expenses lowers your taxable profit. To boot, you may enjoy a personal benefit from a business expenditure -- a nice car to drive, a combination business trip/vacation, a retirement savings plan -- if you follow the myriad tax rules. The balance of this article deals with how the IRS decides when an expense is deductible.

Ordinary and Necessary Expenses

We won't burden you with a lot of tax code sections, but hear us out on this one. Section 162 is the cornerstone for determining the tax deductibility of every business expenditure. Here are the first 35 or so words:

Internal Revenue Code § 162. Trade or business expenses. (a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business...

Section 162 goes on -- and on -- but the important part is that expenses must be "ordinary and necessary" or they can't be deducted. However, the tax code doesn't define either "ordinary" or "necessary." Luckily, in many cases a legitimate business expense under Section 162 is obvious (for instance, office equipment and supplies are clearly deductible).

Pubs and regs. In some cases, such as outlays for travel, the IRS provides specific instructions for determining whether or not an expense is "ordinary and necessary." This is often done through various IRS publications ("pubs") and regulations ("regs").