IRS Publication 463 provides answers to the questions of what types of expenses associated with business activities can be deducted to reduce the overall taxable income of an individual taxpayer. The most discussed and applicable deductions are found in IRS Schedule C for business owners, and Schedule A for some employees with wages reported on a W-2.

For businesses, Schedule C is used to report income and expenses from running a business. This could include a sole proprietorship, an LLC where the owner or owners are self-employed, or a single-member LLC, which is a form of a limited liability company. The form helps break down the cost of goods sold, and the other expenses associated with the business for tax purposes. Businesses can deduct a wide range of expenses, such as the cost of goods sold, marketing and advertising, rent and utilities, professional services, travel and entertainment, and more.

There is a limit to deductions associated with unreimbursed work expenses paid by some taxpayers with wages reported on a W-2. Taxpayers with unreimbursed job expenses greater than 2% of their AGI up to $12,000 can deduct these expenses. The Tax Cut and Jobs Act (TCJA) of 2017 eliminated deductions for most employee business expenses.

Expenses can still be claimed on Schedule A if they are more than $12,000. If a taxpayer itemizes, they may be able to deduct certain business expenses or costs related to their job from their taxable income. Examples of deductible expenses could include supplies and costs related to professional development or licensing etc.

In addition to what can and cannot be deducted, Publication 463 also contains key instructions for taxpayers regarding the proper reporting of business-related deductions. Deductions must be claimed on the correct line and must be reported for the correct year. It is important to keep detailed records of expenses and activities to avoid any trouble with the IRS.

For employers and employees, Publication 463 helps to clarify the rules, regulations and applicable deductions under the TCJA that can reduce taxable income. This IRS resource is a valuable tool that individuals can use to help them understand their taxable income, saving them money and ensuring they are in compliance with tax regulations.