IRS Publication 535 was the longstanding guide to deducting ordinary and necessary business expenses, and although the IRS discontinued it after the 2022 tax year, the rules it collected still govern what you can write off. The same guidance now lives across individual topic pages, form instructions, and the regulations the publication once summarized.1Internal Revenue Service. Guide to Business Expense Resources The underlying test has not changed: a cost that is both ordinary and necessary for your trade or business reduces your taxable income.2Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses Everything else, from the standard mileage rate to bonus depreciation, flows from that principle.
The Ordinary and Necessary Test
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 operate without it.3Internal Revenue Service. Ordinary and Necessary A landscaper buying a new mower meets both prongs. The same landscaper buying courtside basketball tickets does not.
Timing is the second question. If a cost benefits your business only in the current year, like office supplies or a monthly software subscription, you deduct it in full now. If a cost adds lasting value or extends an asset’s life, like replacing a roof or buying heavy equipment, you generally capitalize it and recover the cost over time through depreciation. That line between an immediate expense and a capital expenditure is one of the most frequent audit triggers.
Costs You Can Never Deduct
Some expenses are off-limits no matter how connected they are to your business:
- Personal expenses. Your personal rent, groceries, and clothing are not deductible even if you pay them 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 when the settlement agreement specifically identifies those amounts.5eCFR. 26 CFR 1.162-21 – Denial of Deduction for Certain Fines, Penalties, and Other Amounts
- Political contributions, lobbying expenditures, and direct communications with executive branch officials intended to influence their official actions.6Internal Revenue Service. Nondeductible Lobbying and Political Expenditures
- Expenses tied to tax-exempt income, such as costs incurred to generate municipal bond interest.
When the IRS Treats Your Business as a Hobby
Without a profit motive, the IRS can reclassify your venture 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 short doesn’t automatically make the activity a hobby, but it shifts the burden to you.
The IRS weighs several factors: whether you keep businesslike records, whether you depend on the income, whether losses stem from startup-phase spending or circumstances beyond your control, and whether you’ve adjusted your methods to improve results. If you’re running a side business that regularly loses money, documentation of your profit-seeking efforts is often the difference between keeping 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 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 The flat rate covers gas, depreciation, insurance, repairs, and maintenance in a single number.
The actual expense method requires tracking every vehicle-related 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 (business miles divided by total miles for the year).9Internal Revenue Service. Topic No. 510, Business Use of Car The actual expense method often yields a larger deduction for expensive vehicles driven heavily for business, at the cost of substantially heavier recordkeeping.
If you lease a business vehicle, you deduct the business portion of the lease payments. For higher-value vehicles, the IRS requires an “inclusion amount” that reduces the deduction so the lease write-off doesn’t exceed what depreciation on a purchased vehicle would have allowed. Lookup tables appear in Publication 463.
Either way, you need a contemporaneous mileage log recording the date, destination, business purpose, and miles driven for each trip. Reconstructing a log from memory at year-end is the kind of documentation the IRS rejects.
Travel Expenses
Business travel is deductible when you’re away from your tax home long enough to need sleep or rest.10Internal Revenue Service. Topic No. 511 – Business Travel Expenses Day trips don’t count. Once you cross the overnight threshold, transportation (airfare, train tickets, rental cars), lodging, and incidentals like dry cleaning or local cabs at your destination become deductible.
Mixed-purpose trips get specific treatment. If the primary purpose is business, your transportation to and from the destination is fully deductible, but lodging and other expenses only cover 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 mostly personal and the transportation itself stops being deductible.
Meal Expenses
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 at the meal, 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 the 50% limit applies across the board for standard business meals.
A few categories remain 100% deductible. 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 convenience as the employer, such as keeping staff on site during busy periods.
Substantiation is strict. For each meal you deduct, record the amount, date, location, business purpose, and business relationship of everyone present. “Lunch with client” won’t survive an audit. “Lunch with Jane Smith, discussed Q3 marketing contract” will.
Home Office Deduction
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 your office doubles as a guest bedroom or play area, the deduction is gone. The space doesn’t have to be a separate room, but it 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:
- The simplified method: $5 per square foot of office space, capped at 300 square feet, for a maximum deduction of $1,500. No allocation of actual expenses is required.14Internal Revenue Service. Simplified Option for Home Office Deduction
- The 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 such as painting the office or a dedicated business phone line are fully deductible. Indirect expenses such as electricity, internet, and homeowner’s insurance are deductible only at the business-use percentage. A dedicated business internet line is fully deductible; a shared connection gets allocated between personal and business use.
Employee Compensation and Benefits
Wages, salaries, and bonuses paid to employees are deductible as long as the total compensation is reasonable for the work performed. The IRS compares what you pay to what similar businesses in similar industries pay for comparable work.
The employer’s share of payroll taxes, including Social Security and Medicare contributions, is deductible as a business expense. Self-employed individuals can deduct the employer-equivalent portion of their self-employment tax (half the total) from gross income on their personal return.15Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That deduction reduces adjusted gross income, not the self-employment tax itself.
Retirement Plan Contributions
Contributions you make to qualified retirement plans on behalf of employees are 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 and profit-sharing contributions are deductible separately, subject to overall plan limits.
Self-employed individuals calculating their own retirement contributions can’t simply multiply net profit by the plan’s contribution percentage. Because the contribution itself reduces compensation, you use a reduced contribution rate from the worksheets in Publication 560.17Internal Revenue Service. Self-Employed Individuals: Calculating Your Own Retirement Plan Contribution and Deduction The deduction appears on Schedule 1 of Form 1040, not on Schedule C.
Self-Employed Health Insurance
Self-employed workers who pay for their own coverage can deduct 100% of premiums for medical, dental, and long-term care insurance covering themselves, their spouse, their dependents, and their children under age 27. The deduction is taken against gross income, so you don’t need to itemize.18Internal Revenue Service. Instructions for Form 7206 Two conditions apply: your net business income must at least equal the premium amount, and you can’t claim the deduction for any month you were eligible to participate in a subsidized plan through an employer, including a spouse’s job.
Insurance, Licenses, and Professional Fees
Insurance premiums paid to protect your business are deductible as ordinary and necessary expenses. This includes general liability, professional liability or malpractice coverage, commercial property insurance, business interruption coverage, and workers’ compensation. The policy must relate to business operations, not personal life. A life insurance policy naming you personally as the 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. Legal fees for personal matters like a divorce do not, even if paid from a business account.
Government-imposed costs to operate your business, including business licenses, professional certifications, and annual entity filing fees, are deductible. These vary widely by location and industry but are nearly universal for any formally organized business.
Business Interest
Interest paid on loans used for business purposes, including business credit cards, equipment financing, and commercial mortgages, is generally deductible. Larger businesses face a limitation under Section 163(j): deductible business interest in any year cannot 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 meeting the gross receipts test under Section 448(c) are exempt from the cap. For 2026, the One Big Beautiful Bill made additional changes to how adjusted taxable income is calculated under Section 163(j), particularly for 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 to future years, so it isn’t lost permanently, though the cash-flow impact can be substantial.
Capitalizing and Deducting 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 or skip that waiting period.
Depreciation Under MACRS
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 type of asset 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 the early years using accelerated methods, so you recover more of the cost sooner.
Section 179 Immediate Expensing
Instead of depreciating an asset over years, the Section 179 election lets you deduct the full purchase price in the year the asset is placed in service. For 2026, the maximum deduction is $2,560,000. That limit phases out dollar-for-dollar once total Section 179 property placed in service during the year exceeds $4,090,000, which targets the provision at small and mid-size businesses.22Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
Qualifying property includes tangible personal property like machinery, equipment, vehicles, and off-the-shelf software. Certain real property improvements such as roofs, HVAC systems, fire protection, and security systems installed in existing buildings also qualify. Land and buildings themselves do not. The Section 179 deduction 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. Under the original Tax Cuts and Jobs Act schedule, the bonus rate had been phasing down from 100%, dropping to 80% in 2023 and 60% in 2024. The One Big Beautiful Bill reversed that phasedown, 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
Bonus depreciation applies to property with a MACRS recovery period of 20 years or less, including both new and used assets. Unlike Section 179, it has no dollar cap and no taxable-income limitation, and it applies automatically unless you elect out. A business can combine the two: apply the Section 179 deduction first up to the limit, then use 100% bonus depreciation on the remaining basis.
The De Minimis Safe Harbor
Not every asset purchase requires a depreciation calculation. The de minimis safe harbor election lets you immediately expense low-cost tangible property instead of capitalizing it. With audited financial statements, the threshold is $5,000 per item or invoice. Without them, the threshold drops to $2,500 per item or invoice. You need a written accounting policy in place at the start of the year and must make the election on your tax return. The safe harbor covers items like small tools, office furniture, and minor equipment purchases that aren’t worth tracking as depreciable assets.
Amortization of Intangible Assets
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 15-year period starts in the month you acquire the intangible, and the deduction is 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 amortization. The IRS treats the entire basket of Section 197 intangibles uniformly.
Startup and Organizational Costs
Costs incurred before your business officially opens, like market research, scouting locations, training employees, or advertising a grand opening, are startup costs. Costs to legally create a corporation or partnership, including filing fees and initial legal work on organizational documents, are organizational costs. Without a special election you’d capitalize both categories 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 could immediately deduct only $2,000.26Office of the Law Revision Counsel. 26 U.S. Code 195 – Start-Up Expenditures Whatever can’t be deducted immediately is amortized ratably over 15 years, starting in the month the business begins operations. You make the election on a timely filed return for the first year.
Recordkeeping and Substantiation
The burden to prove every deduction falls on you. For each expense, you need documentation showing the amount, date, business purpose, and (for meals and entertainment) who was involved. Primary documents include receipts, invoices, bank statements, and canceled checks.27Internal Revenue Service. Topic No. 305, Recordkeeping
Travel expenses, meals, and vehicle use face heightened scrutiny because they’re easy to abuse. All three require contemporaneous records, meaning you document them at or near the time you incur them. A mileage log filled in daily holds up in an audit. A spreadsheet built the night before does not. Meal receipts need the specific business purpose noted on them, not just the amount and restaurant name.
How Long to Keep Records
The general rule is three years from the date you filed the return, or the return’s due date, whichever is later.28Internal Revenue Service. How Long Should I Keep Records That minimum stretches in several situations:
- Six years if you fail to report income that exceeds 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, until the statute of limitations expires for the year you dispose of the asset, because you’ll need to prove your original cost basis.
Digital Records
The IRS accepts electronic records in place of paper originals, but your system must meet specific standards. Scanned receipts and digital records must be legible, indexed, and cross-referenced to your general ledger in a way that creates a clear audit trail.29Internal Revenue Service. Electronic Storage System Requirements (Revenue Procedure 97-22) The system must include controls to prevent unauthorized changes or deletion, and you have to give the IRS access to the hardware and software needed to retrieve records during an examination. Stop maintaining the technology needed to read your stored records and the IRS treats those records as destroyed.