Understanding which business expenses are deductible and why a family vacation isn’t

Intuit Academy’s Tax Level 1 materials cover the basics in a way that clicks with how real businesses operate. Let’s walk through a simple, practical example that shows why some expenses are deductible and one obvious exception: a family vacation.

What makes an expense deductible?

Think of a deductible expense as something ordinary and necessary for running the business. The IRS uses those two words—ordinary and necessary—as gatekeepers for what can be subtracted from taxable income. “Ordinary” means the expense is common in your line of work. “Necessary” means it helps you run the business or produce income, even if you don’t use it every day.

That sounds straightforward, but it’s useful to see concrete examples.

• Office supplies: Pens, paper, printers, and the like—these are daily tools of the trade. They help you operate and are clearly ordinary and necessary.

• Employee salaries: Paying people to do work that keeps the business moving is essential. These costs are a core part of most businesses.

• Rental expenses: If you rent space for your business, those payments are a standard cost of staying in operation.

Now, the tricky part: what about something that isn’t clearly a business expense? Here’s the canonical example many first-timers get hung up on: a family vacation.

The family vacation: not a deduction

If you’re picturing a sunlit escape, you’re not alone. But here’s the key point: a family vacation is a personal expenditure, not a business one. The Internal Revenue Service expects deductions to tie directly to the business’s ability to earn income. A vacation doesn’t do that.

That said, there are gray areas you’ll encounter in the real world. If there’s a trip that blends business and leisure, you can sometimes separate the business portion. For example, if you attend a conference for two days and then spend two days sightseeing, you can deduct only the part of travel, lodging, and meals that relates to the business portion. You’d need to keep careful records showing the business purpose, dates, and activities. In other words, “prove the business intent,” and only deduct what actually serves that purpose.

A quick look at other common expenses

To keep things practical, here are a few more everyday expenses and how they’re treated:

• Salaries and wages: Almost always deductible when they’re paid for work that contributes to the business. They’re the classic operating expense.

• Office supplies: Simple, tangible items used in day-to-day operations are deductible as ordinary and necessary costs.

• Rent and lease payments for business property: If you rent office space or equipment used in the business, those payments are deductible.

What about mixed-use costs?

Many small businesses wear more than one hat. A vehicle might be used for both personal trips and business calls. A home office blends personal space with a work corner. In these cases, the rule is simple in spirit: you allocate the portion tied to business use.

• Keep a log: Track the days you use the vehicle for business versus personal use. If 40% of trips are business-related, 40% of the vehicle expenses could be deductible, subject to IRS rules.

• Separate accounts: Use one business card for all business purchases and a personal card for personal stuff. It makes reconciling easier and cuts the guesswork.

• Documentation matters: Receipts, calendars, and appointment logs aren’t just paperwork; they’re proof you can show if the IRS asks.

A few practical tips from the Intuit Academy perspective

If you’re navigating the Tax Level 1 landscape, these habits help keep your numbers clean and your thinking clear:

• Document the business purpose. For every expense, ask: How does this help generate income or keep the business running? If the answer is fuzzy, it’s a red flag.

• Separate personal and business finances. A clean split reduces confusion and makes deductions straightforward.

• Use reliable accounting tools. Software that tracks receipts, categorizes costs, and stores notes helps you stay organized and compliant.

• Understand the big-picture rules. Ordinary and necessary is the baseline. There are exceptions, rules about depreciation for large purchases, and limits on certain categories (like meals or entertainment) that change over time.

• Don’t assume. Tax rules aren’t universal magic. When you’re unsure, check IRS sources or ask a professional. It’s better to confirm than to guess.

When a deduction isn’t just a guess

If you’re ever unsure whether something is deductible, ask the right questions:

• Is this expense directly tied to a business activity or income?

• Does the cost help the business operate or grow?

• Can I separate a personal portion from a business portion with a clear record?

If the answer is yes to the first two questions, you’re on the right track. If not, it’s likely a personal expense and not deductible.

A gentle digression: budgets, cash flow, and confidence

Here’s a tiny truth that often gets missed: understanding which costs are deductible isn’t just about saving money on taxes. It’s also a window into how you run your business. When you can separate personal spending from business spending, you gain clarity about where money actually goes and why. That clarity helps with budgeting, planning, and even negotiating with vendors. It can feel empowering to see how a simple decision—like keeping a separate card for business purchases—ripples through your finances in a positive way.

The big picture, in plain terms

Let’s bring it back to the core idea. A deductible expense is one that is ordinary and necessary for the business. A family vacation doesn’t fit that mold; it’s personal. The other three options in our example—office supplies, salaries, and rental costs—do fit. They are the kind of costs many businesses incur as a normal part of operating.

If you’re exploring the material you’d encounter in Intuit Academy’s Tax Level 1 materials, this is the kind of clarity you want. Think through each expense with two lenses: Is it ordinary in my line of work? Is it necessary to earn revenue or to run the business? If the answer is yes, you’re likely looking at a deductible expense.

A tiny glossary you can tuck away

• Ordinary: Common in your line of business.

• Necessary: Helpful and appropriate for carrying out the business.

• Mixed-use: An expense used for both business and personal purposes; requires allocation.

• Documentation: Receipts, dates, purposes—proof you can show if needed.

• Depreciation: A way to handle big-ticket items that aren’t fully deductible in one year.

A closing thought

Understanding what counts as a deductible expense isn’t about clever tricks or snappy phrases. It’s about how you interpret the day-to-day reality of running a business and how you record what you spend. When you do that well, you build a foundation you can rely on—both for taxes and for the everyday rhythm of managing money.

If you want to dig deeper, IRS publications and reputable tax resources are great companions. They’ll reinforce what you’re learning in Intuit Academy’s Tax Level 1 materials and help you apply the concepts with confidence. And who knows? That confidence might just make the next business decision a little smoother.

Bottom line: the family vacation is the counterexample that helps you see the rule clearly. Everything that keeps the doors open, the phones ringing, and the work flowing—within the boundaries of the tax rules—tends to be deductible. Personal trips and personal spending, not so much. Keep that distinction in mind, stay organized, and you’ll find the numbers easier to read and the decisions easier to make.