The first, most basic guideline to remember is that a tax deduction for an expense paid in connection with your business will be allowed only if the expense is "ordinary and necessary" for the operation of the business.
This doesn't mean that the IRS will attack all sorts of legitimately claimed business deductions, either on the ground that an expense would occur only occasionally (is it ordinary?), or that the expense would be helpful, but not vital to the business (is it necessary?).
In practice, the IRS is rather flexible in this regard. It defines "ordinary" as common and accepted in a field of business, and defines "necessary" as helpful and appropriate to your business.
"Ordinary" usually refers to expenses that are frequent and ongoing, such as amounts spend on gasoline or business meals, but can also apply to something that you pay only once, such as an installation fee for a business telephone line. And an expense does not have to be indispensable to be a necessary expense.
In addition to being "ordinary and necessary," it has been held that a business expense must also be "reasonable." Whether an expense is reasonable depends upon the facts and circumstances in the particular situation. For example, it has been held that providing a chauffeured luxury car to an employee was not unreasonable given the nature of the employment and the congested area in which the car was driven. Entertainment and meal expenses are not deductible to the extent that they are lavish or extravagant, given the circumstances.
In applying the "ordinary and necessary" deduction test, the IRS isn't looking to second-guess your business decisions. You can expect that almost any expense that's fairly common for your type of business will pass muster without serious question. Rather, IRS agents use this test to make sure that the expense is actually spent, and: (1) pertains to the business (instead of personal or family needs), (2) is not also being deducted elsewhere on the return (such as in the cost of goods sold computation), and (3) is a current, rather than capital, expense.
To be deductible, business expenses must be incurred in carrying on an already existing trade or business. Costs associated with starting up a business are considered a type of capital expenditure, and are not fully deductible as current expenses.
To help you decide whether a particular expense is likely to be deductible, we've provided two lists: