Final answer:
Deductible business expenses for tax purposes must be both ordinary and necessary, and they must be reasonable and directly related to the carrying on of a trade or business. These include fixed and variable costs, such as rent, salaries, and the cost of equipment.
Step-by-step explanation:
All ordinary and necessary expenses that are reasonable in amount and incurred in carrying on a trade or business are deductible for tax purposes. This principle is borne out of the general rules of business tax deductions. Ordinary expenses are those common and accepted in the trade or business, while necessary expenses are those that are helpful and appropriate for the trade or business. These expenses may include a variety of costs, such as fixed costs like rent on a factory or retail space, which do not change regardless of the level of production. Variable costs, on the other hand, vary with production levels.
However, for an expense to be deductible, it must not only be ordinary and necessary but also must not be lavish or extravagant under the circumstances. Moreover, the expense must be directly connected to the business. Examples of common deductible business expenses include rent, salaries, utilities, and expenses for machinery or equipment. It's important for businesses to accurately categorize and record these expenses to ensure that they comply with tax laws and take full advantage of allowed deductions.