What Is IRC 262 and What Expenses Does It Cover?
Understand IRC 262 and how it defines personal expenses, distinguishing them from business costs for tax purposes, with examples and recordkeeping tips.
The U.S. tax code allows for many deductions, but some expenses are explicitly non-deductible. Internal Revenue Code (IRC) Section 262 prevents taxpayers from deducting personal, living, and family expenses on their tax returns. Mixing personal and business costs can lead to compliance issues or penalties if improperly claimed.
Understanding IRC 262 helps individuals avoid mistakes when filing taxes. Proper classification ensures only legitimate business expenses are deducted while personal expenditures remain separate.
What Types of Costs Fall Under IRC 262
IRC 262 states that personal, living, and family expenses cannot be deducted from taxable income. This includes costs related to maintaining a household, daily living, and personal well-being. The IRS enforces this rule to ensure only expenses directly tied to income generation receive tax benefits.
General living costs such as rent or mortgage payments for a primary residence, utilities, and groceries are non-deductible. Even if a taxpayer works from home, only the portion used exclusively for business may qualify for a deduction under separate provisions like IRC 280A.
Personal insurance premiums, including life and disability coverage, are also non-deductible. Health insurance may be deductible under specific provisions, but policies that provide personal financial protection rather than medical coverage do not qualify. Similarly, expenses related to hobbies or recreational activities, even if they generate some income, cannot be deducted unless they meet strict business or investment criteria.
Distinguishing Personal vs. Business Elements
Determining whether an expense is personal or business-related depends on its purpose and necessity in generating income. The IRS evaluates deductions based on how directly an expense contributes to business operations.
Mixed-use expenses require careful tracking. A vehicle used for both work and personal errands must have business mileage documented, as commuting costs are considered personal. The IRS typically requires detailed mileage logs to separate business and personal use.
A home office must meet the “exclusive and regular use” test under IRC 280A to qualify for deductions. If a workspace doubles as a guest room or personal study, it does not meet the exclusivity requirement, making the entire expense non-deductible.
Meals and entertainment expenses must be directly related to business to qualify for deductions under IRC 274. A meal with a colleague must involve a substantive business discussion to be deductible, and even then, only 50% of the cost is allowed. Lavish or extravagant expenditures may be disallowed based on IRS guidelines.
Examples of Expenses Covered by IRC 262
Certain costs are explicitly classified as personal under IRC 262 and cannot be deducted when calculating taxable income. These expenses relate to maintaining an individual’s standard of living rather than generating revenue.
Household Items
Everyday household purchases, such as furniture, appliances, and cleaning supplies, are considered personal expenses. Even if an item is used while working from home, it does not qualify for a deduction unless it meets strict business-use criteria under other tax provisions. A desk purchased for a home office may be deductible under IRC 179 if used exclusively for business, but a general-purpose dining table would not qualify.
Home maintenance costs, including repairs, landscaping, and pest control, are non-deductible unless they pertain to a rental property or a home office that meets IRS exclusivity requirements. If 10% of a home is used exclusively for business, only 10% of qualifying maintenance expenses may be deductible under IRC 280A.
Family Healthcare
Medical expenses are generally personal and fall under IRC 262, but some may be deductible under IRC 213 if they exceed a certain threshold. As of 2024, taxpayers can deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income (AGI). This includes costs for doctor visits, prescriptions, and necessary medical procedures. However, elective cosmetic surgery, non-prescription supplements, and general wellness expenses, such as gym memberships, are not deductible unless prescribed by a doctor for a specific medical condition.
Health insurance premiums may be deductible depending on circumstances. Employer-sponsored health plans are typically excluded from taxable income, but self-employed individuals may deduct their premiums under IRC 162(l) if they are not eligible for an employer-subsidized plan. Long-term care insurance may also be deductible, but only up to IRS-defined limits based on age.
Personal Travel
Expenses related to personal travel, including vacations, weekend getaways, and family visits, are explicitly non-deductible under IRC 262. Even if a trip includes some business-related activities, the primary purpose must be work-related for any portion to qualify as a deduction.
For example, if a taxpayer attends a two-day business conference in another state but stays an additional five days for leisure, only the direct costs of the business portion—such as airfare and lodging for the two business days—may be deductible under IRC 162. Meals and incidental expenses during the business portion may also qualify for a 50% deduction under IRC 274(n), but personal sightseeing, entertainment, and extended hotel stays remain non-deductible.
Recordkeeping Essentials
Maintaining accurate records is essential for compliance with tax laws and substantiating deductions if audited. The IRS requires taxpayers to retain documentation for at least three years from the filing date, but in cases involving substantial underreporting of income, records should be kept for up to six years. Documents related to real estate transactions or depreciation schedules may need to be preserved indefinitely.
Proper categorization of expenses is equally important. Financial records should clearly differentiate between deductible and non-deductible costs, with supporting documentation such as receipts, invoices, and bank statements. Digital recordkeeping solutions, including cloud-based accounting software, can simplify organization by automatically categorizing transactions and generating reports aligned with tax requirements. Businesses should also maintain contemporaneous records, meaning documentation is created at the time of the transaction, reducing the risk of discrepancies or missing information.