“Can I write this off?” is the most common question we are asked, and the honest answer is usually a second question: what did the business get for it, and can you show that? This guide is about the reasoning, not a list — because the list changes and the reasoning does not.
Ordinary and necessary, in practice
The statutory test is that an expense must be ordinary and necessary for your trade or business. Read the words carefully. Ordinary means it is a normal expense for someone in your field — a photographer’s camera, a contractor’s tools, a consultant’s laptop. Necessary means helpful and appropriate; it does not mean you could not have run the business without it.
The test is applied against your specific business, which is why comparisons to what a friend deducts are unreliable. Their ordinary is not your ordinary.
The three questions we ask
- What did the business get? If the answer is a benefit to you personally, it is not a business expense however it was paid for.
- Is any part of it personal? If yes, it is a split, not a full deduction — and you need a defensible basis for the split.
- Could you show it to a stranger in three years? Receipt, purpose, and the connection between them.
Timing: when a cost is deducted
Not everything you pay for this year is deducted this year.
- Current expenses — supplies, rent, utilities, wages — are deducted as incurred.
- Capital expenditure — equipment, vehicles, improvements — is capitalised and recovered over time through depreciation, subject to the immediate-expensing provisions that may let you take it sooner.
- Prepaid expenses covering more than the year in question may need to be spread across the periods they cover.
- Inventory is not deducted when purchased; it reduces income when sold, through cost of goods sold.
- Start-up costs incurred before the business opened have their own treatment, with a limited immediate deduction and the remainder amortised.
Records that hold up
The standard is not “a shoebox of receipts”. It is a system where each transaction carries five pieces of information: amount, date, payee, category, and business purpose. Modern accounting software captures the first four automatically from a bank feed. The fifth is on you, and it is the one that decides borderline cases years later.
Some categories carry additional requirements. Travel, meals and vehicle use are subject to stricter substantiation rules than general expenses — for these, the contemporaneous note is not optional.
How long to keep them
Keep supporting records for at least as long as the return can be examined, which is generally three years from filing but longer in certain circumstances — and indefinitely if a return was never filed. Records establishing the basis of an asset should be kept for as long as you own the asset, plus the examination period after you sell it. Depreciation schedules and closing statements are the ones people wish they had kept.
The expenses most often missed
- Bank and merchant processing fees, which arrive net and never appear as a payment.
- Business use of a personal phone and internet connection.
- Mileage for errands — the bank, the supplier, the post office — which adds up quietly across a year.
- Professional development, licences and dues.
- Business equipment bought personally before the business had an account.
- Home office costs, skipped because the owner assumes the space does not qualify.
And the ones that are not deductible
- Commuting between home and a regular workplace.
- Entertainment, under the current rules, even where a business discussion took place.
- Clothing suitable for everyday wear, whatever you wear it for.
- Fines and penalties paid to a government body.
- Political contributions and most lobbying costs.
- Personal expenses routed through the business account — which recharacterise as owner draws, not deductions.
If a specific expense is on your mind, the fastest route to an answer is to ask before you commit to it. A short conversation is cheaper than a disallowed deduction with interest attached.
This article is general information about how the tax rules work, not tax advice for your situation, and the rules change. Speak with a qualified preparer — we are happy to be that preparer — before acting on anything you read here.