Managing business expenses is a universal challenge, whether you’re running a start-up in Sydney or a corporation in San Francisco. IRS Publication 535, a staple for American businesses, details how expenses can be claimed and deducted for tax purposes. While it’s tailored for the US, Australian business owners and accountants can glean valuable insights—especially when comparing these guidelines to the Australian Taxation Office’s (ATO) rules for 2025.
What Is IRS Publication 535 and Why Does It Matter?
IRS Publication 535 is the US Internal Revenue Service’s definitive guide on what constitutes a legitimate business expense. It covers everything from advertising and insurance to home office deductions and employee benefits. For American businesses, it’s the playbook for minimising taxable income while staying compliant.
Key highlights from the 2025 update include:
- Clearer definitions of ‘ordinary and necessary’ expenses
- Updates on deducting start-up and organisational costs
- Expanded guidance on digital advertising and software subscriptions
- Refined rules for travel, meals, and entertainment—especially post-pandemic
While the specifics are US-centric, the overarching principles—only deducting expenses that are both ordinary (common in your industry) and necessary (helpful for your business)—apply globally.
Comparing IRS Publication 535 to ATO Business Expense Rules in 2025
Australian businesses operate under a different tax regime, but the concepts are strikingly similar. The ATO’s guidelines for 2025 reinforce that expenses must be incurred in the course of earning assessable income and must not be private, domestic, or capital in nature.
Let’s break down a few areas where the US and Australian systems converge and diverge:
- Start-up Costs: IRS Publication 535 allows certain organisational and start-up costs to be deducted up to a threshold, then amortised. In Australia, start-up expenses are generally deductible outright, thanks to recent changes aimed at fostering entrepreneurship.
- Home Office Deductions: Both the IRS and ATO have made updates in response to remote work trends. The ATO’s 2025 shortcut method (fixed rate per hour) remains popular, but more granular record-keeping is encouraged—echoing the IRS’s emphasis on substantiation.
- Travel and Meals: The IRS remains stricter, especially post-pandemic, with clear exclusions for entertainment. The ATO has clarified rules for hybrid work travel, focusing on direct business connections and reasonable substantiation.
For example, a Sydney-based consultant claiming travel expenses for a business conference in Melbourne would need to show a direct link to income generation—mirroring the IRS’s approach, but with some Australian flexibility.
Smart Expense Management: Lessons and Action Points for Australians
What can Australian business owners, CFOs, and tax agents learn from IRS Publication 535?
- Keep Detailed Records: Both the IRS and ATO require robust documentation—receipts, invoices, and explanations for each claimed expense. The digital age means cloud-based systems and automated expense tracking are more valuable than ever.
- Understand What’s ‘Ordinary and Necessary’: Don’t assume every cost is deductible. Whether it’s a software subscription or a networking lunch, ensure it’s directly related to income generation.
- Stay Across Policy Updates: The ATO regularly tweaks what’s deductible, especially as technology and work habits evolve. The 2025 guidelines include new rules for digital services, professional development, and hybrid work expenses—echoing similar trends in the US.
- Don’t Overlook Fringe Benefits and Employee Costs: Both tax offices are scrutinising non-cash benefits and perks. Ensure any employee expenses—whether for remote work equipment or wellness programs—are properly classified and supported.
In short, the principles behind IRS Publication 535 are highly relevant in Australia. By understanding both sets of rules, local business owners can benchmark their practices, avoid costly mistakes, and make smarter decisions as tax time approaches.
