A Small Business Primer on Expense Deductions
Whether your small business is new or you’ve run it for decades, you may not fully understand which expenses are potentially tax-deductible and which aren’t. After all, that’s why you have a tax advisor! But it’s worth keeping up with tax law because your daily decisions could significantly reduce your business’s taxable income — and increase its profitability.
The basics
Deductible business expenses must be both ordinary (common and accepted in your field) and necessary (helpful and appropriate for your business). Expenses don’t, however, need to be indispensable to qualify as necessary.
The cost of inventory is recovered through “cost of goods sold,” so it’s not generally deducted immediately. And the cost of buildings, equipment and other capital assets is usually recovered over time through depreciation or amortization. Personal expenses aren’t deductible at all. However, the business portion of mixed-use expenses, such as internet and phone service or vehicle costs, may qualify as deductible if you can support your cost allocation.
Travel and vehicle costs
Reasonable expenses for business travel away from your tax home — including transportation, lodging and certain incidental costs — may be deductible. Convention expenses may also qualify when attendance benefits your business, but restrictions apply to events held outside North America.
If you use your own vehicle for business travel, you may deduct eligible costs using either the actual expense method or the IRS standard mileage rate method. Either way, maintain a mileage log that records dates, destinations, distances and business purposes. Note that ordinary travel between your home and regular workplace is considered a nondeductible personal commuting expense. This is true even if you work on your laptop or make business calls during the trip.
Historically, small business owners recovered the cost of vehicle purchases over several years through depreciation. Current tax law may allow certain qualifying vehicles to be written off more quickly and, in some cases, fully in the first year, through 100% bonus depreciation or Section 179 expensing. To claim either tax break for the 2026 tax year, you generally need to place the vehicle in service before year end. Passenger-vehicle limits, Sec. 179 limits and business-use requirements may restrict the deduction.
New meal and entertainment rules
Beginning in 2026, most meals provided to employees through an employer-operated eating facility or for the employer’s convenience aren’t deductible (with limited exceptions). Recreational events primarily benefiting non-highly compensated employees — such as holiday parties or company picnics — remain fully deductible under the applicable rules.
Business meals are typically 50% deductible so long as:
They aren’t lavish or extravagant,
The owner or an employee is present, and
They have a valid business purpose.
However, entertainment expenses, including event tickets and most club dues, aren’t deductible. But if you purchase food during an entertainment activity with a business purpose, you may be able to deduct it if the bill itemizes costs separately.
Business gifts usually are deductible up to $25 annually per recipient. You may exclude incidental engraving, packaging and shipping costs from that limit if they don’t add substantial value to the gift.
Documentation is critical
We can apply these expense deduction rules for your business, but only you can supply the facts and documentation supporting each expense. Hold on to itemized receipts, mileage logs and other business records (and don’t rely solely on bank or credit card statements). Contact FMD for help claiming deductions available to you and identifying tax-saving opportunities throughout the year.
