A business can generally deduct the costs of running it, and those deductions reduce the profit you pay tax on. The catch is that not every dollar you spend qualifies, and some categories, such as meals and gifts, come with limits. This guide explains the basic tests for business expense deductions, the special rules that trip people up, and what changed for 2025 returns and 2026 planning.
The IRS discontinued Publication 535, Business Expenses, after its 2022 revision. Its content now lives mainly in Publication 334 for small businesses and in topic-specific publications such as 463, 587 and 946.
The basic tests
Ordinary means common and accepted in your line of business. Necessary means helpful and appropriate. An expense does not have to be indispensable to pass. Beyond those two words, the IRS looks at three practical questions.
- Is it business, not personal? You cannot deduct personal, living or family expenses. If an item has both uses, such as a phone or a car, divide the cost between business and personal use, for example by miles driven.
- Is it a current expense or a capital cost? Buying something that lasts well beyond the year, such as equipment or a building, usually must be recovered through depreciation instead. See depreciation, Section 179 and bonus. Paying far in advance for something that lasts beyond the year generally means deducting only the part that applies to each year.
- Was it paid or incurred this year? Cash-method businesses generally deduct when paid, and accrual-method businesses when the obligation is fixed. See cash vs. accrual accounting.
Categories with special rules
| Expense | Rule to know |
|---|---|
| Meals | Generally 50 percent of the cost, including tax and tip. 80 percent for workers subject to Department of Transportation hours-of-service limits. Food that is lavish or extravagant is not deductible. |
| Entertainment | Generally not deductible, including sporting events, theater and club dues where entertainment is a principal purpose. Food and drink bought separately from the event and separately stated may qualify as a meal. |
| Business gifts | $25 per recipient per year. Incidental costs such as engraving and shipping generally do not count toward the $25. |
| Travel | Deductible when you are away from your tax home overnight for business. An assignment expected to last more than a year is treated as indefinite, and travel there is not deductible. |
| Commuting | Not deductible. |
| Small equipment | A de minimis safe harbor election lets many businesses deduct items up to $2,500 per invoice or item, or $5,000 if they have audited or similar financial statements. |
| Vehicles and home office | Separate rules. See vehicle and mileage deductions and the home office deduction. |
The 50 percent limit has exceptions that surprise people. Recreational events for employees, such as a holiday party, are not subject to it. Neither are meals you sell to customers or provide to the general public as advertising or goodwill.
Items you cannot deduct
- Personal and household costs, including commuting.
- Entertainment and the lavish portion of a meal.
- Penalties and fines paid to a government for breaking the law.
- Political contributions.
- The cost of acquiring long-lived assets in one year, unless an election such as Section 179 or bonus depreciation applies.
What changed for 2025 and 2026
The One Big Beautiful Bill Act (Public Law 119-21) touched several business deductions:
- Equipment. Qualifying property acquired and placed in service after January 19, 2025 qualifies for 100 percent bonus depreciation. The Section 179 limit is $2,500,000 for 2025 and $2,560,000 for 2026.
- Research costs. Domestic research and experimental costs paid in tax years beginning after 2024 can again be deducted currently. See start-up costs and research expenses.
- On-premises meals. For amounts paid or incurred after 2025, employers can no longer deduct food and beverage costs for most meals provided through de minimis or convenience-of-the-employer eating facilities. The former 50 percent deduction is gone, though the employee exclusion rules still apply.
- Information returns. The 1099-NEC and 1099-MISC threshold becomes $2,000 for payments made after 2025. See Forms 1099-NEC and 1099-K.
- Interest. Businesses with average annual gross receipts at or below the small business threshold ($31 million for 2025 and $32 million for 2026) are exempt from the business interest limit.
- Mileage. The standard rate is 70 cents per mile for 2025, and 72.5 cents rising to 76 cents on July 1 for 2026.
Records that support the deduction
For each expense, keep proof of the amount, the time and place, and the business purpose. Receipts are generally required for expenses of $75 or more, and lodging always needs documentation. Estimates and approximations do not hold up. Pay business expenses from a business account where you can, and keep the records for the period described in our guide on how long to keep tax records.
How we can help
Good bookkeeping is what makes deductions defensible. We can help you set up categories that match your tax return, review your expenses before filing, and plan purchases so they are timed and documented well. Learn about our business tax preparation, bookkeeping and tax planning services, or contact us.
Frequently asked questions
Can I deduct expenses from before I opened for business?
Costs incurred before your business begins are start-up costs, which follow separate rules. See start-up costs and research expenses.
Is a business meal with a client 100 percent deductible?
Generally no. For most business meals the deduction is 50 percent of the cost, and the food cannot be lavish or extravagant. Entertainment is generally not deductible.
Can employees deduct work expenses they pay out of pocket?
For most employees, no. The deduction for unreimbursed employee expenses was eliminated for tax years beginning after 2017, with narrow exceptions for groups such as Armed Forces reservists and qualified performing artists. This is why employers often use an accountable plan.
What if I pay for an expense with a personal credit card?
The payment method does not decide deductibility. The business purpose does. Keeping business and personal spending separate makes it much easier to prove.
Do I need receipts for everything?
Not always for items under $75, but you still need records that show the amount, date, place and business purpose. Lodging always needs documentation.
Official sources
- IRS: Publication 334, Tax Guide for Small Business
- IRS: Publication 463, Travel, Gift, and Car Expenses
- IRS: Publication 15-B (2026), Employer's Tax Guide to Fringe Benefits
- IRS: Deducting business expenses
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.