26 U.S.C. § 162 — Trade or business expenses

(a) In general. A business may deduct all ordinary and necessary expenses paid or incurred during the year in carrying on a trade or business, including: a reasonable allowance for salaries or other compensation for personal services actually performed; traveling expenses (including meals and lodging, but not amounts that are lavish or extravagant) while away from home for business; and rentals or other payments required to keep using property the taxpayer doesn't own or hold equity in. For a Member of Congress, "home" means the residence within the State, congressional district, or possession they represent — but living expenses within that area are not deductible. For travel expenses, if a period of employment away from home exceeds one year, the taxpayer is no longer treated as "temporarily" away — except this doesn't apply to a federal employee the Attorney General certifies is traveling to investigate or prosecute a federal crime. (b) Charitable contributions and gifts excepted. No deduction is allowed here for a contribution or gift that would only be allowable under section 170, if not for section 170's percentage limits, dollar limits, or timing requirements. (c) Illegal bribes, kickbacks, and other payments. (1) No deduction for a payment, made directly or indirectly, to a government official or employee, if it's an illegal bribe or kickback — including a payment to a foreign government official that's unlawful under the Foreign Corrupt Practices Act of 1977. The Secretary bears the burden of proving the payment was illegal. (2) No deduction for any other illegal payment to any person, if it constitutes an illegal bribe, kickback, or similar payment under federal law, or under generally-enforced State law, that subjects the payor to a criminal penalty or loss of a business license. A "kickback" includes payment for referring a client, patient, or customer. Again, the Secretary bears the burden of proof. (3) No deduction for a kickback, rebate, or bribe by a provider of services, supplier, physician, or similar person connected to payments made under the Social Security Act (including Medicare and Medicaid). (d) Capital contributions to Federal National Mortgage Association. If capital contributions evidenced by Fannie Mae stock (issued under section 303(c) of its Charter Act) exceed the stock's fair market value on the issue date, the initial holder treats that excess as an ordinary and necessary business expense. (e) Denial of deduction for certain lobbying and political expenditures. (1) No deduction for amounts paid or incurred to influence legislation; participate or intervene in a political campaign; attempt to influence the general public about elections, legislation, or referendums; or directly communicate with a "covered executive branch official" to influence official actions. (2) No deduction for the part of dues paid to a tax-exempt organization that the organization notifies the taxpayer is allocable to the expenditures described in paragraph (1). (3) "Influencing legislation" means an attempt to influence legislation through communication with a member or employee of a legislative body, or a government official who may help formulate legislation. "Legislation" has the meaning given in section 4911(e)(2). (4) Two special rules apply. First, a taxpayer whose trade or business is conducting these activities for others may still deduct expenditures for conducting the activities directly on another's behalf (though the other person's payment to the taxpayer for that work is then subject to paragraph (1)). Second, a de minimis exception: paragraph (1) doesn't apply to in-house expenditures of $2,000 or less for the year (not counting certain overhead). "In-house expenditures" excludes payments to an outside lobbying firm, or dues allocable to such activities — those follow the main rule. Research, preparation, planning, or coordination costs for a lobbying activity count as part of that activity. (5) "Covered executive branch official" means: the President; the Vice President; officers or employees of the White House Office and the two most senior officers of each other Executive Office agency; and any individual at Executive Schedule Level I, anyone the President designates as having Cabinet-level status, and their immediate deputies. (6) See section 6033(e) for related reporting requirements and alternative taxes. (f) Fines, penalties, and other amounts. (1) Except as the following paragraphs provide, no deduction is allowed for any amount paid or incurred to, or at the direction of, a government or governmental entity, connected to violating a law or a government investigation into a potential violation. (2) Exception for restitution or compliance amounts: if the taxpayer establishes the amount is restitution (including remediation of property) for harm the violation caused, or is paid to come into legal compliance, and the court order or settlement agreement identifies it as such, the amount is deductible — restitution for unpaid tax is deductible only if it would have been deductible had it been paid on time. The identification alone isn't enough; the taxpayer must still establish it. This exception doesn't cover reimbursing the government for investigation or litigation costs. (3) Exception for amounts paid under a court order in a private lawsuit where no government is a party. (4) Exception for taxes actually due. (5) Certain nongovernmental self-regulatory entities — those that exercise self-regulatory powers connected to a qualified board or exchange, or that perform an essential governmental function — are treated as governmental entities for this rule. (g) Treble damage payments under the antitrust laws. If a taxpayer is criminally convicted of an antitrust violation, or pleads guilty or no contest to one, no deduction is allowed for two-thirds of amounts paid on a Clayton Act section 4 judgment for that violation, or in settlement of a Clayton Act section 4 lawsuit over that violation. (h) State legislators' travel expenses away from home. A State legislator may elect, for a taxable year, to treat their residence within the legislative district as their home. If elected, for each "legislative day," the legislator is deemed to have spent living expenses equal to the greater of the State's or the federal government's per diem rate (capped at 110% of the federal rate), and is deemed away from home on business that day. A "legislative day" is any day the legislature was in session (allowing gaps of 4 consecutive days or less), or a day the legislature was not in session but the legislator's presence was formally recorded at a committee meeting. The election is made as Treasury regulations prescribe. This subsection does not apply to a legislator whose residence is 50 or fewer miles from the State capitol. (i) Repealed in 1989. (j) Certain foreign advertising expenses. No deduction for advertising expenses on a foreign broadcast aimed mainly at the U.S. market, if that country denies a similar deduction for advertising aimed at its own market when placed with a U.S. broadcaster. "Broadcast undertaking" includes radio and television stations. (k) Stock reacquisition expenses. Except as provided below, no deduction is allowed for amounts a corporation pays connected to reacquiring its own stock, or a related person's stock. Exceptions: interest deductions; deductions for amounts properly allocable to indebtedness and amortized over its term; dividends-paid deductions; and amounts connected to redeeming stock of certain regulated investment companies that issue only shareholder-demand-redeemable stock. (l) Special rules for health insurance costs of self-employed individuals. A self-employed taxpayer may deduct amounts paid for insurance that is medical care for the taxpayer, their spouse, dependents, and children under 27. Limits: the deduction cannot exceed the taxpayer's earned income from the business the coverage relates to; it does not apply for any month the taxpayer is eligible for subsidized coverage under an employer's plan (their own, a spouse's, or a dependent's); for long-term care contracts, only "eligible" premiums count under the age-based limits in section 213(d)(10). Amounts deducted here cannot also be deducted as a medical expense under section 213(a). This deduction is not taken into account for self-employment tax purposes. S corporation shareholders treated as partners under section 1372(a) get this deduction too, treating their wages as earned income, with adjustments the Secretary may prescribe. (m) Certain excessive employee remuneration. A publicly held corporation cannot deduct more than $1,000,000 per year in "applicable employee remuneration" paid to a "covered employee." "Publicly held corporation" means an issuer required to register securities under the Securities Exchange Act of 1934, or required to file reports under section 15(d) of that Act. "Covered employee" includes: the principal executive officer or principal financial officer during the year; the 3 next-highest compensated officers required to be reported to shareholders; for tax years after 2026, 2 more of the next-highest compensated employees; and anyone who was a covered employee in any earlier tax year after 2016 (this status carries forward permanently). "Applicable employee remuneration" is the pay otherwise deductible for the employee's services, with an exception for pay under a written binding contract in effect on February 17, 1993, unmodified since, and coordination rules with disallowed golden-parachute payments and a separate excise tax on certain expatriated corporations' stock compensation. A stricter $500,000 cap applies to "applicable employers" that received more than $300 million in troubled-asset purchases under the 2008 Emergency Economic Stabilization Act, covering their chief executive, chief financial officer, and next three highest-paid officers ("covered executives"), with detailed rules on what counts and how long the status lasts. A separate $500,000 cap applies to certain "covered health insurance providers" — health insurance issuers meeting premium thresholds — for tax years starting after 2009 or 2012, covering officers, directors, employees, or others providing services to the provider. If a covered employee is paid by more than one member of a "controlled group" that includes a publicly held corporation, the $1,000,000 limit is divided proportionally among the paying members based on how much each one paid. (n) Special rule for certain group health plans. No deduction for an employer's payments connected to a group health plan that fails to reimburse New York inpatient hospital care at the same rates that licensed commercial insurers (or, for HMO or Article 43 corporation reimbursement, their respective required rates) must pay — unless New York law doesn't actually require that reimbursement rate for the plan involved. (o) Treatment of certain expenses of rural mail carriers. A Postal Service employee delivering mail on a rural route, who receives "qualified reimbursements" for using a vehicle for that work, may deduct exactly the reimbursed amount, treated as paid under a reimbursement arrangement (not subject to the usual itemized-deduction floor under section 62(c)). If actual vehicle expenses exceed the reimbursement, the excess is deductible only as a miscellaneous itemized deduction under section 67. "Qualified reimbursements" means the equipment maintenance allowance under the 1991 collective bargaining agreement between the Postal Service and the National Rural Letter Carriers' Association, or a later agreement's allowance, up to what the 1991 amount would be after a cost-of-living adjustment. (p) Treatment of expenses of reserve component members. A member of a reserve component of the Armed Forces is treated as away from home on business, for section 162(a)(2) purposes, for any period they are away from home in connection with that reserve service. (q) Payments related to sexual harassment and sexual abuse. No deduction for a settlement or payment related to sexual harassment or sexual abuse that is subject to a nondisclosure agreement, and no deduction for attorney's fees related to that settlement or payment. (r) Disallowance of FDIC premiums paid by certain large financial institutions. No deduction for the "applicable percentage" of FDIC premiums paid by the taxpayer. Institutions with total consolidated assets of $10,000,000,000 or less are fully exempt. For larger institutions, the disallowed percentage equals (total consolidated assets minus $10,000,000,000) divided by $40,000,000,000, capped at 100% — so an institution with $50,000,000,000 or more in assets loses the entire deduction. Members of an "expanded affiliated group" (more than 50% common ownership) are treated as a single taxpayer for this rule. (s) Cross reference. For a special rule on expenses connected to subdividing real property for sale, see section 1237. For a special rule on payments by someone who receives a franchise, trademark, or trade name, see section 1253. For special rules on funded welfare benefit plans, see section 419; for deferred compensation and other deferred benefits, see section 404.