Why Are Most Business Expenses Tax Deductible?

The easiest answer to this question is “because the IRS/the government says so.” They’re the ones who came up with the tax code in the first place, and the tax code says that most business expenses are tax deductible. But since “The IRS said I could do it,” doesn’t make a very strong tax audit defense, let’s look a little closer.

One part of the reasoning behind business expenses being tax deductible is the idea that you have to spend money to make money. Many costs that businesses have to bear, especially in the early years when income may be slow to arrive, could be prohibitive. If you’re starting a manufacturing business, for example, the cost of space and equipment alone will be immense. Business loans can help with this, of course, as can startup capital from investors, but if you can’t get those or they aren’t sufficient, you’ll still be on the hook for those costs. Being able to deduct them as business expenses helps make paying them worthwhile, and may be the difference between being able to start the business at all or not.

This leads into another big reason: tax deductions offset the expense of making money. Let’s say your business is making just enough money to cover its costs, but isn’t deducting any business expenses. In that case, you’ll get hit with a tax bill for all of the income you brought in, which will be a pretty big bill—maybe more than you’ve got room in the budget for. A bill like that could put the business under water, or even out of business. Tax deductions reduce the business’s overall income on its tax return, so the amount of taxes they need to pay gets lowered in turn—possibly by a lot, especially if the deductions move the business into a lower tax bracket.

The third reason business expenses are tax deductible is that it encourages business owners to spend money on their businesses. How often have you said “well, that’s pricier than I’d like, but at least I can write it off,” about some kind of investment or cost for your business? At least a couple times a year, right? And you might not have made that purchase otherwise. Tax deductions can sometimes be the deciding factor between making a purchase and not making one, or growing an area of the business and not growing it.

All of this is to say that making business expenses tax deductible is very good for the economy. By enabling businesses to deduct expenses, the government enables those businesses to grow, to maximize their income, to invest in themselves and in some cases to exist at all. More businesses and business growth means more money in the economy—and ultimately more money paid in taxes. It’s a little ironic, actually, that by lowering the tax burden year to year, the IRS actually receives more in taxes in the long run. But it’s also good business, for everyone involved. So even when paying taxes is a chore, remember that it could be a lot worse without those deductions available.