When Business Expenses Are (and Aren’t) Tax Deductible: The Rules Across 5 Countries
Ask any founder about tax season and you’ll get the same half-smile the kind that says they’ve seen receipts go to war with reality. On paper, “business expenses” sound like a simple way to shave down your tax bill. In practice, the definition changes with every jurisdiction, every loophole closed, and every auditor’s mood. Across the U.S., U.K., Canada, Australia, and India, the core question is the same: was this money spent for the sake of the business, or for you?
In The U.S., It’s About Being Ordinary, Necessary, and Bulletproof
Under Internal Revenue Code §162, the IRS wants to see expenses that are both “ordinary” in your industry and “necessary” for running your business. Pay your staff, lease a workspace, buy the raw materials that’s fine. But slip in your daily commute or a traffic fine and you’ll get shut down fast under §262 and §162(f).
Entertainment? Forget it. Since the 2017 reform, that golf trip with clients isn’t deductible. Business meals survive, but at a 50% limit, and the short-lived 100% restaurant write-off ended in 2022. Even gifts are capped at $25 per person, and yes, they’ll check.
For vehicles, you choose: actual costs or the standard mileage rate 70 cents a mile in 2025, up from 67 cents last year but either way, the logbook has to be tight. Big-ticket buys? Those fall under §263 and must be capitalized. You can speed things up with §179 expensing (up to $1.25 million in 2025) or bonus depreciation (40% in 2025), but both have limits and phase-outs.
Startups and reorganizations get a small break: $5,000 upfront, then a long 15-year amortization under §§195 and 248. R&D costs? Since 2022, you can’t expense them right away they’re spread over five or fifteen years depending on where the work happens.
And none of it matters if your records are sloppy. The IRS has a knack for killing deductions on technicalities. They expect receipts, logs, and a business reason written down at the time you spent the money. Keep them for at least three years, four for payroll records.
The U.K.: Wholly And Exclusively, No Wiggle Room
Across the Atlantic, HMRC plays the same game with different language. If it wasn’t spent “wholly and exclusively” for business, it’s out. Office supplies, salaries, and travel between work sites qualify. Take a client out for lunch? You’ll eat that cost literally because client entertainment isn’t deductible.
Flat-rate systems exist for mileage, home working, and living at your business premises, but they demand accurate time logs and cost tracking. And while you don’t submit receipts with your Self Assessment, HMRC can knock on your door years later and ask to see them.
Canada: Reasonable Or Nothing
The Canada Revenue Agency is more subtle about it. Expenses have to be “reasonable” and directly tied to earning income. If it’s a mixed-use item your phone, your car, your home office you’ll need to carve out the personal portion. Meals and entertainment get a 50% haircut unless you hit special exemptions like remote camps or large promotional events. Capital items follow a depreciation schedule, not an immediate write-off.
Australia: Prove It’s Directly Connected
The Australian Taxation Office expects you to prove a direct connection between the expense and your taxable income. That means your client holiday party isn’t making the cut, unless it’s for staff. Depreciation rules apply to big purchases, and home-based operators can use fixed-rate deductions for certain running costs but again, recordkeeping is king.
India: Wholly And Exclusively, With Teeth
India’s §37(1) runs on the “wholly and exclusively” principle, but with some sharp exclusions. Spend on corporate social responsibility? That’s good PR, but you can’t deduct it. Capital and personal costs are out. Documentation matters here too, though the process can feel more negotiation than rigid formula.
The Repeat Offenders
No matter the country, the same traps keep tripping business owners:
- Commuting costs masquerading as business travel
- Client entertainment
- Fines and penalties
- Capital items slipped in as current expenses
- Missing or vague documentation
The pattern is predictable. If the expense feels even slightly personal, it’s going to raise eyebrows. If it’s not documented, it’s already lost.
Bottom Line
The tax code isn’t built for optimism. It’s built for proof. The U.S. calls it “ordinary and necessary.” The U.K. says “wholly and exclusively.” Canada demands “reasonable.” Australia wants “directly connected.” India insists on “wholly and exclusively” again. Different words, same message: if you can’t draw a straight line from the money spent to the revenue earned and show the paper trail don’t count on the deduction surviving first contact with the taxman.
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Ethan is a Lisbon-based leadership strategist who helps remote-first startups scale through systems, team clarity, and async culture.
