With 2025 now in the rearview mirror and the tax filing deadline approaching, businesses should begin organizing records related to deductible expenses for the 2025 tax year. However, determining which expenses qualify for a deduction isn’t always straightforward — and many taxpayers are surprised to learn that not all business-related costs are deductible.
While business owners often assume that any expense connected to operations can be written off, tax law applies more nuanced rules.
The General Rule for Business Deductions
Most allowable business deductions aren’t itemized in detail within the Internal Revenue Code (IRC). Instead, the governing standard comes from IRC Section 162. Under this provision, taxpayers may deduct “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”
In addition to meeting this standard, businesses must be able to properly substantiate the expense with adequate documentation.
What Does “Ordinary and Necessary” Mean?
To qualify for a deduction, an expense must satisfy both parts of this test.
Ordinary Expenses
An expense is considered ordinary if it’s common and customary within a particular industry or line of business. For example, a landscaping company’s costs for fuel and routine maintenance of mowing equipment would generally qualify as ordinary because such expenses are typical for that business.
Necessary Expenses
A necessary expense is one that’s helpful or appropriate for the business. The expense doesn’t have to be essential to survival, but it should reasonably support business operations.
For instance, a retail store may be able to function without security cameras, but installing them can help deter theft and protect employees and customers. As a result, the expense may be considered necessary.
When Ordinary Isn’t Necessary
Even if an expense is ordinary, it may still fail the deductibility test if it’s deemed unreasonable. Consider a construction business that replaces functional, professional-grade tools with ultra-premium versions that offer little additional benefit. While purchasing tools is ordinary, excessive spending that doesn’t align with business needs may be viewed as unnecessary — and therefore nondeductible.
When the IRS Pushes Back
The IRS and the courts frequently challenge deductions when taxpayers can’t substantiate expenses or when the activity doesn’t rise to the level of a trade or business.
Lack of Substantiation
In one case, the U.S. Tax Court denied deductions claimed by the owner of an engineering firm for the value of his own labor spent developing a software program. The court noted that self-performed services aren’t expenses that are “paid or incurred,” making them nondeductible. Additional deductions were also denied due to insufficient documentation and unclear business purpose.
Not a Trade or Business
In another case involving real estate activities, the Tax Court disallowed the taxpayer’s claimed business deductions, ruling that the activities were investment-related rather than an active trade or business. The taxpayer also failed to maintain adequate records. On appeal, the U.S. Court of Appeals for the Ninth Circuit upheld the decision, citing a lack of sufficient evidence to support the deductions.
What Can You Deduct for 2025?
Determining which business expenses are deductible — and ensuring proper documentation — can be complex. Careful recordkeeping and a clear understanding of tax rules are essential.
Professional guidance can help you identify which expenses qualify and ensure you’re well prepared when filing your 2025 tax return.
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