Year-End Tax Strategy: What Business Expenses Still Count

As the year draws to a close, it's the perfect time for business owners to review their expenses and optimize their tax strategy. By accelerating deductible expenses into the current year, you can potentially reduce your 2025 tax liability and even achieve permanent tax savings. Recent legislative updates, including the One Big Beautiful Bill (OBBB), have made significant changes to the deductibility of certain expenses, building on the foundation laid by the Tax Cuts and Jobs Act (TCJA).

Understanding Deductible Business Expenses

The Internal Revenue Code (IRC) doesn't provide a comprehensive list of deductible business expenses. Instead, IRC Section 162 allows deductions for expenses that are both "ordinary and necessary." An ordinary expense is one that is common in your industry, while a necessary expense is helpful and appropriate for your business operations. However, even qualifying expenses may be disallowed if deemed lavish or extravagant by the IRS.

Key Expense Categories Affected by OBBB and TCJA

• Entertainment Expenses 

The TCJA largely eliminated deductions for entertainment expenses starting in 2018. Exceptions remain for employee parties, provided the entire staff is invited. The OBBB has not altered these rules.

• Meal Expenses 

Business meals continue to be 50% deductible under both TCJA and OBBB. Meals associated with nondeductible entertainment are also 50% deductible if purchased separately or itemized on receipts. Through 2025, meals provided on the employer’s premises are subject to the 50% rule, with the deduction scheduled to end in 2026. The OBBB maintains this timeline but allows some exceptions for a 100% deduction. Meals sold to employees generally qualify for full deductibility.

• Transportation Expenses 

Business travel transportation remains fully deductible. However, TCJA permanently removed deductions for qualified transportation fringe benefits like parking and transit passes. These benefits remain tax-free for employees within set limits. The OBBB does not change these provisions. Additionally, the previously scheduled return of bicycle commuting reimbursements in 2026 has been permanently eliminated by the OBBB.

• Employee Business Expenses

The TCJA suspended deductions for unreimbursed employee business expenses through 2025. The OBBB has now permanently eliminated this deduction. Businesses should consider implementing IRS-compliant reimbursement plans by 2026 to ensure these expenses remain deductible and tax-free for employees.

• Bonus Depreciation Expense

The TCJA gradually phased out the bonus depreciation deduction for tax years 2023-2027. However, the OBBB has permanently reinstated the 100% deduction for most property acquired after January 19, 2025. Additionally, the OBBB introduced Qualified Production Property (QPP), a new category of building property eligible for the 100% bonus depreciation. To qualify, QPP must be constructed after January 19, 2025, and placed in service before January 1, 2031.