Are Your 2025 Business Deductions Ready? What to Review Before You File

With the 2025 tax filing season in progress and deadlines fast approaching, it is imperative for business owners to thoroughly review last year’s expenses. Collecting receipts and creating reports helps start your tax filing, but separating expenses from income or business from personal can transform your tax filing process into a positive one.

 

As a business owner, here’s how to determine if your business expenses are in fact, deductible.

 

The Foundation of Business Deductions

Most deductible business expenses are not individually listed in the tax code. Instead, the Internal Revenue Code Section 162 requires that deductions be “ordinary and necessary” business expenses. And, to be claimed, the expense must be properly documented.

Now, let’s break down what “ordinary and necessary” really means.

What Is an “Ordinary” Expense?

An expense is considered ordinary if it’s common and accepted in your industry.

For example, for a landscaping company, fuel costs and routine maintenance for lawn equipment are customary and expected. These expenses are typical for that type of business and would generally qualify as ordinary.

What Is a “Necessary” Expense?

A necessary expense is one that is helpful and appropriate for your business.

Take a retail store that installs security cameras. While cameras may not be required for the store to operate, they help prevent theft and protect employees and customers. Because the expense serves a legitimate business purpose, it would typically meet the “necessary” requirement.

Both Standards Must Be Met AND the Amount Must Be Reasonable

An expense must be both ordinary and necessary to be deductible. It must also be reasonable in amount.

For example, a construction company purchasing professional-grade tools would typically meet the standard. However, if the company chooses to upgrade to high-end, luxury tools when standard professional tools would adequately perform the job, the IRS could question whether the added cost was reasonable.

The expense category may be ordinary, but excessive spending can create problems.

Where Businesses Run into Trouble

During filing season, two issues frequently cause deductions to be denied:

1. Inadequate Documentation - Even legitimate expenses can be disallowed without proper records. If you can’t substantiate it, you generally can’t deduct it.

2. Not Being Engaged in an Active Trade or Business – Sometimes the issue isn’t the expense, but whether the activity qualifies as a trade or business.

Courts have denied deductions where a taxpayer attempted to deduct the value of their own labor. Self-performed services aren’t considered expenses that are “paid or incurred.”

Similarly, a taxpayer claimed real estate business deductions, but the activity was determined to be an investment rather than an active trade or business. Without sufficient activity and documentation, the deductions were disallowed.

These cases reinforce an important principle: intent alone isn’t enough. You must demonstrate active business operations and maintain adequate records.

What You Should Do Now

Good news! There is still time to review your 2025 records before filing. Consider taking the following steps:

1.     Reconcile your accounting records to bank and credit card statements

2.     Review large or unusual expenses for reasonableness

3.     Confirm you have documentation for travel, meals, and vehicle expenses

4.     Separate personal and business expenses

5.     Identify any gray areas that need professional guidance

Addressing potential issues now can help prevent delays, amended returns, or IRS correspondence later.

Don’t Assume — Verify!

Business deductions are a powerful tool for lowering taxable income, but they also attract close examination by the IRS. Since the definitions of "ordinary and necessary" expenses can be subjective, it's up to the taxpayer to provide proper documentation for their claims.

As you get ready to file your 2025 business taxes, take time now to make sure your deductions are precise, reasonable, and well documented. Reviewing your information in advance will help you file confidently later.