IRS Publication 535 was the agency’s consolidated guide to deducting business expenses, and although the IRS stopped publishing it after the 2022 tax year, the rules it explained still control what businesses can and cannot write off. The same guidance now lives across individual IRS topic pages, form instructions, and the underlying Internal Revenue Code sections.1Internal Revenue Service. Guide to Business Expense Resources The core test hasn’t changed: an expense reduces your taxable income only if it is both ordinary and necessary for your trade or business.2Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
The Ordinary and Necessary Test
Every business deduction starts with two words. An expense is ordinary if it’s common and accepted in your industry. It’s necessary if it’s helpful and appropriate for your business, even if you could technically operate without it.3Internal Revenue Service. Ordinary and Necessary A landscaper buying a new mower meets both. That same landscaper buying courtside basketball tickets for fun meets neither.
Timing sits inside the same test. Costs that benefit only the current year, like office supplies or a monthly software subscription, come off in full that year. Costs that add lasting value or extend an asset’s life, like a new roof or heavy equipment, must be capitalized and recovered over time. The line between an immediate expense and a capital expenditure is one of the most frequent audit triggers, so it’s worth thinking about before you file rather than after.
Expenses That Are Never Deductible
Some costs stay off the return no matter how tightly they connect to your business.
- Personal expenses. Your personal rent, groceries, and clothing are never business deductions, even if paid from a business account.4Internal Revenue Service. Income and Expenses
- Fines and penalties paid to a government for violating a law, from parking tickets to regulatory penalties. A narrow exception exists for restitution and compliance costs, but only when the settlement specifically identifies those amounts.5eCFR. 26 CFR 1.162-21 – Denial of Deduction for Certain Fines, Penalties, and Other Amounts
- Political contributions, lobbying expenditures to influence legislation, and direct communications with executive branch officials to influence their official actions.6Internal Revenue Service. Nondeductible Lobbying and Political Expenditures
- Costs tied to tax-exempt income. If you earn income that isn’t taxed, such as interest from municipal bonds, the expenses producing that income can’t offset your taxable income.
When the IRS Calls Your Business a Hobby
If your venture doesn’t show a profit motive, the IRS can reclassify it as a hobby and disallow your deductions. The agency presumes your activity is a legitimate business if it turns a profit in at least three of the last five tax years, or two of seven for horse-related activities.7Internal Revenue Service. Is Your Hobby a For-Profit Endeavor? Falling below that threshold doesn’t automatically make you a hobbyist, but it shifts the burden onto you.
Beyond raw profitability, the IRS looks at whether you keep businesslike records, whether you depend on the income, whether losses come from startup spending or circumstances beyond your control, and whether you’ve adjusted methods to improve results. If you run a side business that regularly loses money, thorough records and documented profit-seeking efforts are the difference between keeping your deductions and losing them.
Vehicle Expenses
You can deduct business vehicle costs using either the standard mileage rate or the actual expense method. The standard mileage rate for 2026 is 72.5 cents per mile, plus any business-related parking fees and tolls.8Internal Revenue Service. The Standard Mileage Rates and Maximum Automobile Fair Market Values Have Been Updated for 2026 That flat rate covers gas, depreciation, insurance, repairs, and maintenance in one calculation, which keeps recordkeeping simple.
The actual expense method requires tracking every vehicle cost: fuel, oil changes, tires, insurance, registration, repairs, and the depreciation or lease payments on the vehicle itself. You total those costs and multiply by your business-use percentage, which is business miles divided by total miles for the year.9Internal Revenue Service. Topic No. 510, Business Use of Car Actual expenses often yield a larger deduction for expensive vehicles driven heavily for business, but the paperwork burden is much higher.
If you lease a vehicle for business, you deduct the business portion of the payments. For higher-value vehicles, the IRS requires you to add back an “inclusion amount” that reduces your deduction, so leasing doesn’t produce a bigger write-off than buying and depreciating would have.
Whichever method you pick, you need a contemporaneous mileage log with the date, destination, business purpose, and miles for each trip. A log reconstructed from memory at year-end is exactly the kind of documentation the IRS rejects in audits.
Travel Expenses
Business travel is deductible when you’re away from your tax home long enough that you need to stop for sleep or rest.10Internal Revenue Service. Topic No. 511 – Business Travel Expenses Day trips don’t clear that bar. Once you do, transportation (airfare, train, rental car), lodging, and incidental costs like dry cleaning or local cab rides at the destination all qualify.
Mixed trips get split treatment. If the primary purpose is business, transportation to and from the destination is fully deductible, but you can deduct lodging and other expenses only for the days you actually conduct business. Fly to a conference and stay the weekend to sightsee, and the airfare is deductible while the extra hotel nights and personal meals are not. Flip the ratio so the trip is primarily personal, and the transportation stops being deductible too.
Meals
Business meals are generally deductible at 50% of the cost.11Office of the Law Revision Counsel. 26 U.S. Code 274 – Disallowance of Certain Entertainment, Etc., Expenses You or an employee must be present, and the cost can’t be lavish or extravagant.12Internal Revenue Service. Income and Expenses 2 The temporary 100% deduction for restaurant meals expired at the end of 2022, so 50% now applies across the board.
A few categories still qualify for 100%. Food and beverages at company parties, picnics, or similar recreational events primarily for rank-and-file employees are fully deductible. So are meals provided to the general public for promotional purposes. And meals you provide on your business premises for your own convenience as the employer, such as keeping staff on-site during busy periods, can also be fully deductible.
Substantiation is strict. For every deducted meal, record the amount, date, location, business purpose, and the business relationship of the people present. “Lunch with client” won’t survive scrutiny. “Lunch with Jane Smith, discussed Q3 marketing contract” will.
Home Office
If you use part of your home exclusively and regularly as your principal place of business, or as a space where you meet with clients, you can deduct a portion of your housing costs.13Internal Revenue Service. Topic No. 509, Business Use of Home “Exclusively” is the trip wire. If the office doubles as a guest bedroom or a play area, the deduction is gone. It doesn’t have to be a separate room, but the space must be used only for business.
You qualify as using the space as your principal place of business if it’s where you do your most important work, or if you handle administrative and management tasks there and have no other fixed office. Two calculation methods are available:
- Simplified method. Deduct $5 per square foot up to 300 square feet, capped at $1,500. No allocation of actual expenses.14Internal Revenue Service. Simplified Option for Home Office Deduction
- Regular method. Calculate actual home expenses (mortgage interest or rent, utilities, insurance, repairs, depreciation) and deduct the percentage attributable to your office based on its share of total square footage.4Internal Revenue Service. Income and Expenses
Under the regular method, direct expenses like painting the office or installing a dedicated business phone line are fully deductible. Indirect expenses like electricity, internet, and homeowner’s insurance are deductible only at the business-use percentage.
Compensation, Benefits, and Retirement Contributions
Wages, salaries, and bonuses paid to employees are deductible as long as total compensation is reasonable for the work performed. Reasonable has no bright-line dollar figure; the IRS compares what you pay to what similar businesses pay for comparable work. Owner-employees of closely held corporations face the most scrutiny, because inflated salaries can be reclassified as disguised dividends.
The employer’s share of payroll taxes, including Social Security and Medicare, is deductible. If you’re self-employed, you can deduct the employer-equivalent portion of your self-employment tax (half the total) directly from gross income on your personal return.15Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Contributions to qualified retirement plans on behalf of employees are also deductible. For 2026, the employee 401(k) contribution limit is $24,500, with a $8,000 catch-up for workers 50 and older and an $11,250 catch-up for those aged 60 through 63.16Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Employer matching or profit-sharing contributions are deductible separately, subject to overall plan limits. Self-employed individuals calculating their own contributions must use a reduced contribution rate from the worksheets in Publication 560, because the contribution itself reduces the compensation base.17Internal Revenue Service. Self-Employed Individuals: Calculating Your Own Retirement Plan Contribution and Deduction
If you’re self-employed and pay for your own health insurance, you can deduct 100% of the premiums for medical, dental, and long-term care coverage for yourself, your spouse, your dependents, and your children under age 27. The deduction runs against gross income, so you don’t need to itemize.18Internal Revenue Service. Instructions for Form 7206 Two conditions: your net business income must at least equal the premium, and you can’t claim the deduction for any month you were eligible to participate in a subsidized health plan through an employer, including through a spouse’s job.
Insurance, Fees, and Interest
Insurance premiums that protect your business are deductible: general liability, professional liability or malpractice, commercial property, business interruption, and workers’ compensation. The policy must relate to business operations, not personal life. A life insurance policy naming you as the personal beneficiary isn’t a business expense even if you’re the sole owner.
Fees paid to attorneys, accountants, bookkeepers, and tax preparers for business work are deductible under the same ordinary-and-necessary standard. Legal fees for drafting business contracts or resolving a commercial dispute qualify; fees for personal matters like a divorce or personal criminal defense do not, even if paid from a business account. Government-imposed business licenses, professional certifications, and annual entity filing fees all qualify.
Interest paid on loans used for business purposes, including business credit cards, equipment financing, and commercial mortgages, is generally deductible. Larger businesses face a cap under Section 163(j): deductible business interest can’t exceed business interest income plus 30% of adjusted taxable income.19Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Small businesses that meet the gross receipts test under Section 448(c) are exempt. The One Big Beautiful Bill made further changes to how adjusted taxable income is calculated for 2026, particularly around capitalized interest and certain foreign income items.20Internal Revenue Service. IRS Updates Frequently Asked Questions on Changes to the Limitation on the Deduction for Business Interest Expense Disallowed interest carries forward, so it isn’t lost permanently, but the cash-flow effect of delayed deductions can be significant.
Recovering the Cost of Business Assets
When you buy property that lasts more than a year, the general rule is that you can’t deduct the full cost immediately. You capitalize it and recover the cost through depreciation (for tangible property) or amortization (for intangibles). Several provisions let you accelerate that recovery or skip the wait altogether.
MACRS Depreciation
The Modified Accelerated Cost Recovery System is the standard depreciation method for most business property placed in service after 1986.21Internal Revenue Service. Topic No. 704, Depreciation MACRS assigns each asset type a recovery period: 5 years for computers and vehicles, 7 years for office furniture and most equipment, 15 years for land improvements like parking lots, 27.5 years for residential rental buildings, and 39 years for commercial buildings. The system front-loads deductions in early years using accelerated methods.
Section 179 Expensing
The Section 179 election lets you deduct the full purchase price of qualifying property in the year it’s placed in service instead of depreciating it. For 2026, the maximum deduction is $2,560,000, phasing out dollar-for-dollar once total Section 179 property placed in service during the year exceeds $4,090,000.22Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets Qualifying property includes tangible personal property (machinery, equipment, vehicles, off-the-shelf software) and certain real property improvements installed in existing buildings, including roofs, HVAC, fire protection, and security systems. Land and buildings themselves don’t qualify. The deduction also can’t exceed your taxable income from active business operations for the year, though any excess carries forward.
Bonus Depreciation
Bonus depreciation lets you deduct a large percentage of an asset’s cost in the first year, on top of any Section 179 deduction. The Tax Cuts and Jobs Act had scheduled a phasedown that dropped the rate to 80% in 2023 and 60% in 2024. The One Big Beautiful Bill reversed that path, restoring a permanent 100% first-year depreciation deduction for qualified property acquired after January 19, 2025.23Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill It applies to property with a MACRS recovery period of 20 years or less, new or used. Unlike Section 179, bonus depreciation has no dollar cap and no taxable-income limitation, and it applies automatically unless you elect out. A common strategy is to take the Section 179 deduction first up to the limit, then apply 100% bonus depreciation to the remaining basis.
The De Minimis Safe Harbor
Not every asset purchase needs a depreciation calculation. The de minimis safe harbor election lets you immediately expense low-cost tangible property. If your business has audited financial statements, the threshold is $5,000 per item or invoice. Without audited statements, it’s $2,500. You need a written accounting policy in place at the start of the year and must make the election on your return.
Amortizing Intangibles
Intangible assets like goodwill, customer lists, trademarks, patents, and covenants not to compete are recovered over 15 years on a straight-line basis when acquired in connection with a business.24Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles The period starts in the month you acquire the intangible, spread evenly across each month.25Internal Revenue Service. Intangibles You can’t accelerate it, and you can’t cherry-pick individual intangibles from a business acquisition for shorter periods. The entire basket is treated uniformly.
Startup and Organizational Costs
Costs incurred before your business officially opens, such as market research, scouting locations, training employees, or advertising a grand opening, are startup costs. Costs to legally create a corporation or partnership, like filing fees and initial legal work on organizational documents, are organizational costs. Without a special election, both categories would be capitalized indefinitely with no annual deduction.
The tax code lets you immediately deduct up to $5,000 of startup costs and a separate $5,000 of organizational costs in the year the business begins. Each $5,000 allowance is reduced dollar-for-dollar once the respective total exceeds $50,000, so a business with $53,000 in startup costs can only immediately deduct $2,000.26Office of the Law Revision Counsel. 26 U.S. Code 195 – Start-Up Expenditures Whatever you can’t deduct immediately is amortized ratably over 15 years, starting in the month the business begins operations. The election is made on a timely filed return for the first year.
Recordkeeping and Substantiation
The IRS puts the burden on you to prove every deduction you claim. For each expense, you need documentation showing the amount, date, business purpose, and who was involved (for meals). Primary documents include receipts, invoices, bank statements, and canceled checks.27Internal Revenue Service. Topic No. 305, Recordkeeping
Certain categories face heightened scrutiny because they’re easy to abuse. Travel, meals, and vehicle use all require contemporaneous records, meaning you document them at or near the time you incur them. A daily mileage log holds up in an audit. A spreadsheet created the night before does not.
How Long to Keep Records
The general rule is three years from the date you filed the return, or the due date, whichever is later.28Internal Revenue Service. How Long Should I Keep Records Several situations stretch that minimum:
- Six years if you fail to report income exceeding 25% of the gross income shown on your return.28Internal Revenue Service. How Long Should I Keep Records
- Indefinitely if you don’t file a return or file a fraudulent one.
- For depreciable property, keep records until the statute of limitations expires for the year you dispose of the asset, because you’ll need to prove original cost basis.
The IRS accepts electronic records in place of paper originals, but the system must be legible, indexed, cross-referenced to your general ledger, and controlled against unauthorized changes.29Internal Revenue Service. Electronic Storage System Requirements (Revenue Procedure 97-22) If you stop maintaining the technology needed to read your stored records, the IRS treats those records as destroyed.