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Not all “business” expenses are tax deductible

Tax season is approaching, and it’s time to gather your business expense records for 2025. But figuring out what you can actually deduct isn’t always straightforward.

The Basic Rule

The IRS doesn’t give you a specific checklist of deductible expenses. Instead, they use a simple principle: you can write off expenses that are both “ordinary and necessary” for running your business. You also need to keep good records to prove these expenses.

What does “ordinary” mean? It’s a common expense in your type of business. For example, if you run a landscaping company, buying fuel and maintaining your lawn equipment are ordinary costs because every landscaping business has these expenses.

What does “necessary” mean? It’s a helpful or appropriate expense for your business. For instance, security cameras for a retail store might not be absolutely required, but they help prevent theft and protect your employees and customers.

The Catch: It Must Be Both

Here’s where business owners sometimes get tripped up. An expense needs to be both ordinary and necessary. Just because something is common in your industry doesn’t mean the IRS will approve an unreasonable amount.

Example: A construction company buying tools is ordinary. But upgrading to premium, top-of-the-line tools when standard professional tools would do the job? The IRS might consider that excessive and deny the deduction.

Common Mistakes to Avoid

The IRS has denied deductions for reasons like:

• Poor record-keeping – You need receipts, invoices, and documentation
• Your own labor – You can’t deduct the value of time you spend working in your business
• Investment activities – If you’re holding real estate as an investment rather than actively running a real estate business, different rules apply

Bottom Line

Tax deductions can save your business significant money, but the rules are more nuanced than they appear. Good record-keeping is essential, and when in doubt, it’s worth getting professional help.

We’re here to help you maximize your deductions for 2025 while staying on the right side of IRS rules. Reach out to your local Padgett office if you have questions about what you can deduct.

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