Many self-employed individuals assume that any purchase made for their work is an automatic tax deduction, but the reality is far more nuanced. As we approach the April 2026 filing deadline, it is critical to remember that the IRS defines "business use" through a very specific lens: the expense must be common for your industry and appropriate for your operations.
Under the One Big Beautiful Bill Act (OBBBA), the rules for everything from home office equipment to self-performed labor have been clarified, often to the taxpayer’s surprise.
Before you claim that premium upgrade or personal travel as a business cost, you need to ensure it meets the rigorous "Section 162" standards that the IRS uses to separate legitimate professional expenses from non-deductible personal spending.
Ordinary and necessary
In general, an expense is ordinary if it’s considered common or customary in the particular trade or business. For example, a landscaping company’s costs for fuel and routine maintenance on its lawn equipment would typically qualify as ordinary expenses because such costs are customary for that type of business.
A necessary expense is defined as one that’s helpful or appropriate. For instance, a retail store that invests in security cameras may be able to operate without them, but the expense is helpful for reducing theft and protecting employees and customers.
To be deductible, an expense must be both ordinary and necessary. An ordinary expense may be unnecessary because the amount isn’t reasonable in relation to the business purpose. For example, let’s say a construction business upgrades to premium, top-of-the-line tools when standard professional-grade tools already meet job requirements. Tool purchases are ordinary, but excessive upgrades may be unreasonable and, thus, unnecessary.
Cases in point
The IRS and courts don’t always agree with taxpayers about what qualifies as a deductible business expense. Often substantiation is the primary issue. Sometimes the question hinges not on the expense itself, but on whether the taxpayer was actually operating a trade or business.
For example, the U.S. Tax Court denied deductions claimed by an engineering firm owner for the value of his own time spent developing a program. Self-performed labor isn’t “paid or incurred,” the court noted. Therefore, it’s not deductible. The court disallowed other deductions due to insufficient records and lack of a clear business purpose.
In another case, a taxpayer engaged in real estate activities. His business expense deductions were denied by the Tax Court. The court ruled that the activities didn’t constitute an active trade or business. Instead, the real estate was held for investment purposes. In addition, the deductions weren’t substantiated because adequate records weren’t kept. The taxpayer appealed. The U.S. Court of Appeals for the Ninth Circuit agreed with the Tax Court. The court ruled the taxpayer “failed to provide sufficient evidence of his claimed deductions.”
What can you deduct for 2025?
Determining the deductibility of business expenses can be complicated, and proper substantiation is critical. Your Rudler, PSC advisor can help you determine what you can deduct on your 2025 tax return. Contact us at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Chris Seitz, Senior Client Accounting Specialist and Heather Davis, CPA.
If you would like to discuss your particular situation, contact Chris or Heather at 859-331-1717.
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