Yes, you can continue using the deduction item, C_Geil. I'll further discuss why you encounter the message when adding the item to an invoice.

In QuickBooks Desktop, deduction items are linked to an expense account and added to an invoice using a negative amount to subtract payments accordingly. The alert you see, "This item is associated with an expense account. Do you want to continue?" is a reminder about this connection. This is standard behavior, so you can safely proceed without creating a new item.

Moreover, consider scanning this material for guidance when linking customer payments to their invoices: Record an invoice payment.

Please continue to update us in this thread if you have other inquiries about deduction items on sales transactions in QuickBooks Desktop. We're always around to help.

Thank you Rainflurry.  That makes sense to me.  You are correct that this process is actually deducting expenses from my accounts.  By linking this billable item to an expense account I believe I've dropped the income portion of the accounting balancing process.  Everything billed to a tenant should be considered income to me (even if it is something I've paid for) in order to accurately reflect dollars coming into the business (I'm actually making money from the security deposit liability account).  Then, when I pay the expense I incurred, that payment will show as a business expense and lower the income side.  

    .... Does this thought process make sense and sound correct?

I believe my next step should be to correct my item list by linking all the billing items to "rental income."  However, since I've used the expense item on several other invoices, I should probably make that item inactive, and create a new item linked to the rental income account?

BTW, I'm using 2014 Pro Desktop, not 2004.

@C_Geil 

"By linking this billable item to an expense account I believe I've dropped the income portion of the accounting balancing process."

You may know this so forgive me if that's the case but, when you mark an item as billable on a transaction, it just triggers a reminder to add it to the next invoice for that customer.  You don't have to keep the expense item on the invoice, you can use whatever item and amount you want so you can choose an income item and mark it up as you want.   

"Does this thought process make sense and sound correct?"

Yes.