Business Income and Deductions

Which business costs are deductible, when and how much: meals, gifts, vehicles, home office, interest under section 163(j), bad debts, prepaid and small-dollar items, inventory, fringe benefits and start-up costs. The SEE tests the dollar limits and the many expenses that look deductible but are not.

Business Tax Preparation5 min read7 sections

Must-know for the exam

Business meals with a client are 50% deductible; entertainment such as game tickets is not deductible at all (IRC 274(a), 274(n); Pub. 463 (2025)).
Business gifts are deductible up to $25 per recipient per year; incidental wrapping and shipping are not counted (IRC 274(b)(1)).
The 2025 business standard mileage rate is 70 cents; it must be chosen in the first year an owned car is used in business (Notice 2025-5; Rev. Proc. 2019-46).
Simplified home office method: $5 per square foot, up to 300 square feet ($1,500), for space used regularly and exclusively for business (Rev. Proc. 2013-13; IRC 280A(c)).
For years beginning after 2024, 163(j) adjusted taxable income again adds back depreciation and amortization; the limit is 30% of ATI plus business interest income (IRC 163(j) as amended by P.L. 119-21).
Businesses meeting the $31,000,000 gross receipts test for 2025 are exempt from 163(j), UNICAP and formal inventory rules (IRC 448(c), 471(c); Rev. Proc. 2024-40 sec. 3.31).
De minimis safe harbor: deduct up to $2,500 per item or invoice, $5,000 with an applicable financial statement (Treas. Reg. 1.263(a)-1(f)).
Fines paid to a government for violating a law are not deductible (IRC 162(f)).
2025 qualified parking exclusion is $325 a month; employers cannot deduct qualified transportation fringes (IRC 132(f), 274(a)(4); Rev. Proc. 2024-40 sec. 3.17).
Start-up and organizational costs: deduct up to $5,000 each, reduced above $50,000, and amortize the rest over 180 months (IRC 195(b), 248).

On this page · 7 sections

Traps that cost marks

Deducting half of entertainment costs as under pre-2018 law.
Deducting the full cost of business gifts.
Using the 2024 rate.
Switching to the standard rate after taking accelerated depreciation.
Ignoring the 300-square-foot cap.
Allowing a home office for shared living space.
Using the 2022-2024 EBIT-based ATI.
Deducting uncollected receivables of a cash-method business.

Why it matters on the exam

Business deductions carry the largest Part 2 domain, with 37 scored questions. Most items test one limit or one disallowance rule, so the fastest path is knowing which costs are fully deductible, partly deductible, capitalized or never deductible.

The starting rule is IRC 162: ordinary and necessary expenses of carrying on a trade or business. Section 274 and other provisions then cut specific items back.

Travel, meals, gifts and vehicles

Expense	2025 deduction
Client meal	50%: a $400 dinner gives $200
Entertainment (tickets, golf)	None
Business gifts	$25 per recipient: 10 baskets at $60 gives $250
Car, standard mileage	70 cents a mile plus business parking and tolls
Car, actual expenses	Required after MACRS, section 179 or bonus on the car, or for fleets of five or more
Work clothing	Only if required and not suitable for everyday wear
Trade association dues

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Business Tax Preparation