What business expenses are deductible 2025-2026 (OBBBA Tax Law Update)?
- Rebecca Tabert, CPA
- Jul 31
- 14 min read
Are you maximizing your business tax deductions? Do you know how the OBBBA (Big New Bill) will affect you and how to take advantage of it? Understanding what expenses are deductible can save your business money and improve your financial health.
The One Big Beautiful Bill Act (OBBBA), signed in July 2025, introduced some of the most significant tax changes for business owners in years. From restoring 100% bonus depreciation to making the 20% Qualified Business Income (QBI) deduction permanent and expanding Section 179 expensing limits, these updates can substantially reduce taxable income for small businesses. At the same time, new temporary deductions for tips, overtime, and other costs create short‑term opportunities that require careful planning. Understanding how these changes interact with traditional business expense rules can help you maximize your deductions, stay compliant, and make smarter financial decisions throughout the year.
What business expenses are deductible under the new tax laws 2025-2026?
Business expenses are the costs you have to pay to keep your business running. The IRS generally lets businesses subtract these costs from taxable income, helping you keep more of your revenue. Below is your usual expense list, with new OBBBA‑specific changes flagged where they apply.
Office Supplies and Equipment:
This includes items like pens, paper, computers, or even desks and chairs that you use for work.
OBBBA Update: No specific changes, but still fully deductible as ordinary and necessary.
Rent and Utilities:
If you rent a space for your business, the rent is deductible. You can also deduct things like electricity, water, and internet bills.
OBBBA Update: No material change to rules, though you may now deduct leased equipment more fully thanks to increased Section 179 limits.
Paying Employees:
The money you pay to your employees, including salaries, bonuses, and even health insurance or retirement benefits, can be deducted.
OBBBA Additions (2025–2028):
Overtime deduction: Workers can deduct up to $12,500 (single) or $25,000 (joint) of qualified FLSA overtime premium pay. (Must be separately reported on W‑2 or 1099.)
Tip deduction: Cash tips in customary tipped occupations can be deducted up to $25,000. Same income phase‑out rules apply.
Employers must separately report qualified overtime and cash tip amounts on W‑2s/1099s.
Professional Help:
If you hire someone like a lawyer, accountant, or consultant to help with your business, you can deduct the cost of their services.
OBBBA Update: No specific changes, but still fully deductible as ordinary and necessary.
Travel and Meals:
If you travel for work, you can deduct costs like plane tickets, hotel stays, or meals while you’re on a business trip. There are rules about how much you can deduct for meals, so it’s good to check those.
OBBBA Insight: Some allowances for employer‑provided meals remain; no direct statutory changes here yet.
Advertising and Marketing:
Money you spend on things like social media ads, websites, or business cards to promote your business can be deducted.
OBBBA Update: No specific changes, but still fully deductible as ordinary and necessary.
Business Insurance:
If you pay for insurance to protect your business, like liability or property insurance, you can deduct the cost.
OBBBA Update: No specific changes, but still fully deductible as ordinary and necessary.
Big Purchases (Depreciation):
If you buy something expensive for your business, like a truck or a machine, you can’t usually deduct the full price right away. Instead, you can spread the deduction over several years.
OBBBA Upgrades:
100% bonus depreciation is now permanent for qualified property placed in service after January 19, 2025.
Section 179 expensing limit increased to $2.5 million (phase‑out begins at $4 million), effective for tax years beginning after December 31, 2024.
Qualified Production Property (QPP) for U.S. manufacturing: allowed 100% deduction under new Section 168(n) for investments placed in service mid‑2025 through 2030
*This is incredibly important to understand. If you have any questions, make sure to call a tax professional before you buy big ticket items.
Learning and Training:
If you pay for classes, books, or training to help you or your employees do the job better, these costs can be deducted.
OBBBA Update: No specific changes, but still fully deductible as ordinary and necessary.
Bank and Loan Costs:
Interest on loans for your business and fees from your business bank account can also be deducted.
OBBBA Business Interest Rule Update: The Act restores EBITDA-based limitation rules, allowing add‑backs for depreciation, amortization, and depletion when calculating deductibility.
To deduct these expenses, you’ll need to keep records, like receipts or invoices, and show that the money was spent for business purposes. The expenses must be both "ordinary" (something typical for your type of business) and "necessary" (something that helps you run your business).
Think of it this way: If it’s something you wouldn’t spend money on if you weren’t running your business, there’s a good chance it might be deductible.
Can different businesses deduct different expenses?
Yes, the types of expenses you can deduct depend on the kind of business you run. Every business has unique costs, and the IRS understands that what’s “ordinary” and “necessary” for one business might not apply to another.
Retail Stores:
A store can deduct costs for inventory (the products they sell), credit card fees, and even shelving or display cases.
OBBBA update: With the new Section 179 limits and 100% bonus depreciation, you can now immediately deduct the full cost of retail display systems or shelving.
Construction Companies:
These businesses can deduct things like tools, safety gear, fuel for work trucks, and payments to subcontractors.
OBBBA update: The permanent bonus depreciation and enhanced Section 179 allow rapid write-offs for vehicles, heavy machinery, or leased construction equipment.
Home-Based Businesses:
If you work from home, you might be able to deduct part of your rent or mortgage, utilities, and even internet bills as part of a “home office deduction.” The space you use must be dedicated to work.
OBBBA update: No direct change here, but this deduction pairs well with OBBBA’s new equipment write-offs when your business expands.
Freelancers or Contractors:
People who work on their own can deduct things like software subscriptions, mileage for traveling to meet clients, and even part of their phone bill if they use it for work.
OBBBA update: If performing U.S.-based research or innovation, you can now deduct qualified R&D costs immediately. However, make sure to consult a tax professional familiar with the R&D requirements, as they are very specific.
Restaurants:
Restaurants can deduct the cost of food, beverages, kitchen supplies, and things like repairs to equipment.
OBBBA update:
Cash tip income can now be deducted by eligible tipped workers (up to $25,000 annually), and employers must report it on W‑2s.
Qualified overtime pay also qualifies for a deduction (up to $12,500 single / $25,000 joint), under FLSA rules.
Manufacturers & Tech R&D Firms
Deduct equipment, factory overhead, software, prototypes, and patent costs.
OBBBA update:
You can now fully expense domestic R&D expenditures immediately, rather than amortizing them over five years.
Qualified production property (e.g. manufacturing real estate or machinery) also gets 100% bonus depreciation when placed in service before 2031.
Make sure to consult a tax professional familiar with the R&D requirements, as they are very specific.
Some deductions are specific to certain industries. For example, a professional photographer might deduct camera gear, editing software, and costs for renting studio space. A truck driver might deduct fuel, repairs, and even overnight lodging on long trips.
What counts as a deductible expense really depends on what you do to earn money. The key is to ask yourself: “Does this expense directly help me run my business?” If the answer is yes, it’s likely deductible. Just make sure to keep good records and receipts so you can prove it’s a legitimate business cost if anyone asks.
When are business expenses deductible?
Business expenses are deductible in the year you spend the money, but there are some rules to keep in mind depending on the type of expense:
Regular Expenses (Immediate Deduction): Most everyday expenses, like office supplies, utilities, or employee wages, can be deducted in the same year you pay for them. For example, if you buy printer paper in March, you deduct it when you file taxes for that year.
OBBBA Update: No direct change, ordinary and necessary rules still apply for 2025–2026.
Big Purchases (Spread Over Time): If you buy something expensive for your business, like equipment or a vehicle, you can’t deduct the full amount all at once. Instead, you spread the cost over several years through a process called “depreciation.” This helps show that the item’s value decreases as you use it.
OBBBA Upgrade:
100% bonus depreciation is permanent for qualified tangible property placed in service on or after January 19, 2025—allowing full deduction in the year you put it into service.
Section 179 limit increases to $2.5 million (phase-out begins at $4 million), allowing smaller businesses to immediately expense even more capital investments.
Qualified production property (QPP) used in manufacturing or refining can also be fully expensed if placed in service before 2030.
Prepaid Expenses: If you pay for something in advance, like a year of insurance, you might not be able to deduct the full amount right away. Instead, you’ll need to spread the deduction across the months or years the payment covers.
OBBBA Update: No substantial changes in 2025–2026; taxpayers should follow standard accrual or cash‑basis rules.
Expenses for Future Use: If you buy something for your business that you’ll use in future years, like a large supply of materials, the deduction might need to match how and when you use it.
OBBBA Update: Timing rules remain unchanged—deduct based on service/use period.
Start-Up Costs & Section 174 R&D Amortization
Before 2025, businesses had to amortize domestic R&D over five years—sometimes delaying valuable deductions.
OBBBA Update:
Section 174A now allows immediate expensing of domestic R&D costs incurred in tax years beginning after December 31, 2024.
Eligible small businesses (avg receipts under $31 million) can elect to amend or adjust 2022–2024 returns to fully expense past R&D costs in 2025—either through amended filings or within original filings if not yet submitted, depending on IRS guidance.
Business Interest & Loan Interest Timing
Interest on business loans and bank fees is deductible when paid, subject to IRS interest limitations.
OBBBA Update:
Business interest deduction limits (IRC §163(j)) are restored to allow add-back of depreciation, amortization, and depletion when calculating adjusted taxable income—effective for tax years 2025 onward.
Travel, Meals & Entertainment
Business travel costs, hotel stays, and business meals (up to 50%) are deductible in the year incurred, as long as a business purpose exists.
OBBBA Update: For now, no direct statutory shift. Travel and meal deductibility continue under existing IRS rules—still must meet ordinary and necessary and documentation requirements.
Temporary Deductions (2025–2028): Tips & Overtime
These new deductions appear at the refund or taxable income level rather than under ordinary business expense rules—but timing matters.
Details:
Overtime deduction: Qualifying FLSA overtime pay can be deducted in the year received (2025–2028), with caps ($12,500 single / $25,000 joint) and MAGI phase-outs ($150K/$300K) Internal Revenue Service.
Tip deduction: Cash-tip income (2025–2028) up to $25,000/year may be deducted in the year received, subject to wage reporting requirements and MAGI limits Internal Revenue Service.
Employers must report these amounts separately on employees’ W‑2s or 1099s for the deductions to be taken correctly.
The best way to ensure you deduct expenses at the right time is to keep track of when you pay for something and what it’s for. Using software or hiring a professional can help make this easier and avoid mistakes.
What are the steps to finding the best business expenses to deduct?
Figuring out which business expenses to deduct might feel overwhelming, but breaking it into steps can make it manageable. Here’s a straightforward process to help:
Step 1: Understand Your Business Needs
Think about what you spend money on to keep your business running. Write down the major categories of your expenses, such as rent, equipment, supplies, or travel. This will give you a clear picture of where your money goes.
Step 2: Separate Business and Personal Expenses
It’s important to keep your personal and business expenses separate. If you use something for both, like your phone or car, figure out how much of it is for work. For example, if 70% of your phone use is for business, you can deduct that portion.
For employees reporting tips or overtime deductions, make sure payroll systems capture and log FLSA overtime and cash tip pay separately on W‑2s or 1099s.
Step 3: Check IRS Rules
The IRS requires expenses to be “ordinary and necessary” to qualify as deductions. Ordinary means common in your industry, and necessary means it helps your business operate. Review the IRS guidelines or talk to a tax professional to ensure the expense qualifies.
Check OBBBA-specific caps and phase-outs:
QBI deduction thresholds now start at $75,000 single / $150,000 joint with a minimum $400 deduction, and phase-outs modified in 2026.
For overtime/tip deductions: phase-out thresholds run up to $275K (single) or $550K (joint) depending on deduction type.
Step 4: Keep Detailed Records
For every expense, save proof like receipts, invoices, or bank statements. Write down what the expense was for and how it relates to your business. Good record-keeping can protect you if you’re ever asked to explain a deduction.
For tips/overtime: retain payroll logs, employee tip reports, documented regular vs. premium pay amounts. This ensures the deduction holds up if audited.
Step 5: Look for Industry-Specific Deductions
Some deductions are unique to certain types of businesses. For instance:
A writer might deduct books and research materials.
A delivery service could deduct fuel and vehicle maintenance.
A retail store might deduct the cost of store displays or inventory.
Step 6: Review with a Professional
If you’re unsure whether an expense is deductible, consult with a tax professional. They can help identify deductions you might not know about and make sure you’re following the rules.
OBBBA introduces complex planning choices (timing depreciation, reporting tips/overtime, retroactive R&D expensing).
A tax advisor can help align your bookkeeping and payroll systems, validate eligibility, and optimize timing to maximize benefits—especially in transitional years.
Step 7: Use Tools or Software
Consider using accounting software to track and categorize expenses. Many programs automatically sort expenses into deductible categories, making tax preparation easier.
Most common myths about deductible business expenses
Myth: Everything you buy for your business is deductible.
Reality: Not all purchases qualify as business tax deductions. The IRS only allows deductions for expenses that are both “ordinary” (common in your industry) and “necessary” (helpful for running your business). For example, buying a luxury item like designer furniture for your home office won’t qualify unless it directly serves a business purpose. Always review IRS guidelines or consult a tax professional before assuming an expense is deductible.
Myth: You can deduct personal expenses if you own a business.
Reality: Personal expenses, like your personal rent, groceries, or family vacations, cannot be deducted just because you own a business. To qualify, an expense must directly support your business activities. For instance, a home office deduction only applies to the portion of your home used exclusively and regularly for work purposes. Mixing personal and business expenses is one of the top reasons deductions get flagged in IRS audits.
Myth: If you use your car for work, you can deduct the entire cost.
Reality: Only the business-use portion of your vehicle expenses is deductible. If you use your car for both personal and business reasons, you need to track mileage carefully and calculate the percentage used for work. The IRS allows either the standard mileage rate or actual expense method, but good record-keeping is essential for whichever method you choose.
Myth: Cash payments don’t need to be documented.
Reality: Even if you pay in cash, you must keep detailed records—like receipts, invoices, or bank withdrawals—to prove the expense. The IRS requires documentation for all deductible business expenses, regardless of how they are paid. Without proof, you risk losing valuable deductions and facing penalties if audited.
Myth: Small expenses aren’t worth tracking.
Reality: Small purchases, like coffee for a client meeting or office supplies, may seem insignificant but can add up to hundreds or even thousands of dollars over a year. These deductions directly reduce your taxable income, making them worth documenting. Using accounting software or mobile apps to log even minor costs can help ensure you maximize your savings.
(FAQ) Frequently asked questions about deductible business expenses
Question: Can I deduct my home internet bill as a business expense?
Answer: Yes, but only the portion used directly for business purposes. For example, if 50% of your internet use is for work activities like managing client communications or operating a home office, you can deduct that portion of your bill. To comply with IRS rules, keep detailed records showing how you calculated the percentage of business use. If you qualify for the home office deduction, your internet costs can often be included as part of your overall home office expenses.
Question: Are business meals with clients tax deductible?
Answer: Yes, business meals with clients are typically 50% deductible if they have a clear and legitimate business purpose, such as discussing a project, negotiating a contract, or developing client relationships. To ensure this deduction is allowed, always keep the receipt and make notes of the date, attendees, and purpose of the meeting. The IRS requires proper documentation for business meal deductions, and vague or personal outings will not qualify. *We recommend: keeping the receipt, writing what it applies to and who was at the meal.
Question: Can I deduct clothes I buy for work?
Answer: Only if the clothing is specifically required for your job and not suitable for everyday wear. Examples include branded uniforms with a company logo, safety gear like steel-toe boots, or protective equipment for certain industries. General professional attire, like suits, dresses, or regular shoes, does not qualify for a tax deduction—even if you wear them to work every day.
Question: Are employee gift cards tax-deductible for my business?
Answer: Yes, gift cards given to employees are deductible as a business expense, but they are also considered taxable income for the employee. To remain compliant, track the expense carefully and report it properly on employee wage forms (such as W‑2s). For non-taxable employee gifts, consider low-cost items like small holiday gifts under IRS limits instead of cash equivalents like gift cards.
Question: Can I deduct startup costs for my new business?
Answer: Yes, you can deduct up to $5,000 in qualified startup costs during your first year of operation, with any additional startup expenses amortized (spread out) over several years. Deductible startup costs may include market research, legal or professional fees, business licensing, and initial equipment purchases before officially opening your doors. If your startup costs exceed the $50,000 threshold, your deduction may be reduced, so careful planning is essential.
Question: Can I deduct tips or overtime pay under the new tax laws?
Answer: Yes, under the One Big Beautiful Bill Act (OBBBA), employees in qualifying occupations can deduct up to $25,000 in cash tips and up to $12,500 (single) or $25,000 (joint) of FLSA‑qualified overtime pay from taxable income between 2025–2028. Employers must separately report these amounts on W‑2s or 1099s for the deduction to be valid.
Question: Can I write off my car or vehicle expenses for business?
Answer: Yes, but only for the business-use portion of the vehicle. You can use either the IRS standard mileage rate or the actual expense method (covering gas, maintenance, and depreciation). Keep detailed mileage logs to substantiate your claim. Note: If the vehicle is also used personally, only the percentage used for business purposes can be deducted.
Question: Are credit card processing fees deductible?
Answer: Yes, merchant service fees, credit card processing charges, and transaction fees for business payments are fully deductible. These costs are considered ordinary and necessary expenses for running a business, especially in retail and service-based industries.
Question: Can I deduct tips or overtime pay under the new tax laws?
Answer: Yes, under the One Big Beautiful Bill Act (OBBBA), employees in qualifying occupations can deduct up to $25,000 in cash tips and up to $12,500 (single) or $25,000 (joint) of FLSA‑qualified overtime pay from taxable income between 2025–2028. Employers must separately report these amounts on W‑2s or 1099s for the deduction to be valid.
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Final Thoughts
Identifying and deducting business expenses is one of the most effective ways to lower your taxable income and keep your business financially healthy. By understanding which costs are deductible, maintaining accurate records, and consulting tax regulations or professionals when needed, you can maximize your deductions while staying compliant with IRS rules.
Every business is unique, so tailoring your deductions to your specific industry and needs is key. If you’re unsure about any expense or want to ensure you’re taking full advantage of tax-saving opportunities, it’s always a good idea to consult a qualified tax professional.
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