All Business Expenses aren’t Tax Deductible

As we move past 2025 and the new tax-filing season draws near, it’s the perfect time for businesses to organize records of their deductible expenses. Figuring out what qualifies as a deduction isn't always simple.

Understanding the Tax Code

The Internal Revenue Code doesn’t list every possible business deduction. Instead, under Section 162, businesses are allowed to deduct expenses that are “ordinary and necessary” and incurred in the course of running the business, as long as they are properly documented.

What Ordinary and Necessary Mean

Ordinary - An expense is considered ordinary if it’s typical for your industry or line of business. For instance, a landscaping company’s costs for gasoline and routine equipment maintenance are expected and customary.

Necessary - An expense is necessary if it’s useful or appropriate for your business. For example, a retail store might install security cameras; while not absolutely required, they are a reasonable safety investment that can be considered necessary.

Both criteria must be satisfied. An expense may be ordinary but not necessary if the amount is excessive for the business’s needs. For example, buying premium tools when standard professional-grade tools are sufficient.

Typical Issues and Court Cases

The IRS and tax courts sometimes reject deductions. Two common reasons are lack of proper documentation and questions about whether the taxpayer was truly operating a business.

Self-Performed Labor - The Tax Court has ruled that you can’t deduct the value of your own unpaid labor, such as time spent developing a program, because it’s not considered an expense that’s “paid or incurred.”

Investment vs. Business Activity - In another case, a taxpayer’s real estate activities were viewed as investments rather than an active business, leading to denied deductions. Inadequate records further weakened the claim, and the Ninth Circuit supported the denial due to insufficient proof.

Preparing for 2026 (2025 Tax Year)

Navigating deductible business expenses can be challenging, and keeping detailed records is crucial. We can help you review your 2025 business activities and documents to pinpoint eligible deductions and ensure your tax return is properly supported.