Get your Small Business Accounting Tax-Ready for 2025
- Sonia Lee
- 7 days ago
- 6 min read
By: Sonia Lee Ng, CPA
Date: August 27, 2025
Introduction
In this article we summarize accounting aspects that small businesses should consider geting the accounting records ready for tax preparation for year 2025. Here are the most common business expenses.
Business Expenses
Most individuals and sole proprietors with no inventory use the cash method since it is easier for recordkeeping. Under the cash method, in general, you deduct expenses in the year you actually paid them.
You may deduct the cost of operating your business. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
Deductibility: a business expense must be both ordinary and necessary. Ordinary-common and accepted in your field of business. Necessary-it is helpful and appropriate for your business. It does not have to be indispensable to be considered necessary.
Common business expenses
Bad Debts
A business bad debt arises from the worthlessness of a debt that was created or acquired in your business and that is closely related to your business. Business bad debts mainly results from credit sales to customers that then become uncollectible.
Deductibility: You can only deduct bad debts if the amount owed was included in your gross income for the year the deduction is claimed or for a prior year.
Car and Truck Expenses
If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. May also deduct other costs of local transportation and traveling away from home overnight on business.
Keep track of mileage and actual expenses.
Track your mileage and you may be able to take a deduction on the mileage used.
Business and Self-Employed: 70 cents per mile
Medical: 21 cents per mile
Military Moving miles: 21 cents per mile
No deduction is allowed for the cost of commuting: going from your home to your regular workplace. The IRS allows only deductions for travel from your home office to other business locations for meetings with clients, etc.
Depreciation
If you acquire property to use in your business and it is expected to last more than 1 year, in general, you cannot deduct the entire cost as a business expense in the year you acquire it. There are exceptions, see IRS Pub. 946.
Payroll and Compensation
Payments to employees for the services performed for your business. This includes regular compensation, bonuses, fringe benefits, etc.
Insurance
Premiums for insurance related to your business: fire, theft, flood, etc., credit insurance, self-employed health insurance, group medical and hospitalization insurance, long-term care insurance, liability insurance, malpractice insurance, workers compensation insurance, state unemployment insurance, overhead insurance, car insurance, life insurance, business interruption insurance, etc.
Interest
Interest expense paid or accrued during the tax year on debts related to your business. If you used the proceeds of the loan for a business expense. Subject to limitations.
Legal and Professional Fees
Expenses that are ordinary and necessary and related to operating your business: accountant fees, tax preparation fees, attorneys' fees, and consultants.
Pension Plans
Small business retirement plans for owners and employees. These are tax-favored ways to save money for retirement.
a. SEP (Simplified Employee Pension) plans
b. SIMPLE (Savings Incentive Match Plan for Employees) plans
c. Qualified plans (including Keogh or H.R. 10 plans)
Rent Expense
Amounts paid for the use of property you do not own but you use for your business.
Taxes
You can deduct federal, state, local, and foreign taxes directly attributable to your business.
a. Income Taxes: State taxes on gross income.
b. Employment Taxes: Social Security, Medicare, and FUTA taxes
c. Self-Employment Tax: you may deduct 50% of Self-Employment Tax.
d. Personal Property Tax: Any tax imposed by state or local government on personal property you use in your business. Includes the registration fees for the right to use property within a state or local area.
e. Real Estate Taxes: any state, local or foreign taxes on real estate levied for the general public welfare, paid on your business property.
f. Sales Tax: Paid on service or on the purchase or use of property as part of the cost of the service or property.
g. Excise Tax: Taxes on certain goods or activities.
h. Fuel Taxes: Taxes on gasoline, diesel fuel, and other motor fuels you use in your business.
Travel and Meals
Travel Expenses are ordinary and necessary expenses of traveling away from home for business. You can generally deduct the amount you reimburse your employees for travel and meal expenses.
a. Transportation
b. Taxi, commuter bus, and limousine
c. Baggage and shipping
d. Car or truck
e. Meals and lodging
f. Cleaning
g. Telephone
h. Tips
De Minimis Safe Harbor for Tangible Property
In general, you must capitalize costs to acquire property or produce real or tangible personal property used in your trade or business: buildings, equipment, or furniture. But, if you elect to use this safe harbor, you may deduct the minimis amounts paid to acquire or produce certain tangible property if these amounts are deducted for you for financial accounting purposes or in keeping your books and records.
This safe harbor may be used to deduct amounts paid for tangible property up to $5,000 per item or invoice, for an applicable financial statement.
With no applicable financial statement: This safe harbor may be used to deduct amounts paid for tangible property up to $2,500 per item or invoice.
This accounting policy should be applied consistently and the election should be made each year with the tax return.
Other Expenses
a. Advertising
b. Bank fees
c. Donations to business organizations*
d. Education expenses
e. Impairment-related expenses
f. Interview expense allowances
g. Licenses and regulatory fees
h. Moving machinery
i. Outplacement services
j. Penalties and fines for late performance or nonperformance of a contract.
k. Repayments of income
l. Supplies and materials
m. Utilities
Business Use of Home
Generally, you cannot deduct items related to your home such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses.
You may deduct business expenses that apply to a part of your home if that part of your home is used on a regular basis as your principal place of business, as a place of business used by your patients, clients or customers to meet with you in the normal course of your business. Exceptions apply.
You may use your actual expenses or a simplified method.
Actual Expenses
Divide the expenses of operating your home between personal and business use. Classify expenses as direct (deductible), indirect (needs allocation using the percentage calculation) or unrelated (nondeductible).
If you are claiming the standard deduction, you have increased your standard deduction had you not used your home for business. If the expense is indirect, use the business percentage of these expenses to figure how much to include in your total business-use-of-the home deduction. If you are itemizing your deductions, these expenses include: real estate taxes, home mortgage interest, casualty losses (federally declared disasters). If claiming the standard deduction, these expenses only include net qualified disaster losses that increase your standard deduction.
Other deductible expenses
Casualty losses (not federally declared disaster)
Depreciation
Insurance
Rent paid
Repairs
Security system
Utilities and services
Business use Percentage: Compare the size of the part of your home that you use for business and the size of your whole house to obtain a percentage.
Simplified Method
You may make an election for this method to figure the deduction for the qualified use of the home on a timely filed, original federal income tax return. (this election is irrevocable).
You cannot deduct any actual expenses for the business except for business expenses that are not related to the use of the home.
You cannot deduct any depreciation for the portion of the home that is used for a qualified business use.
Treat as personal expenses your mortgage interest, real estate taxes, and casualty losses.
No deduction of carryover of actual expenses from prior year.
Deduction under the Simplified Method
The deduction for the qualified business use of your home is the sum of each amount you figure for separate qualified use of your home. You will need the following information:
The allowable area of your home used for business.
The gross income from the business use of your home.
The amount of business expenses that are not related to the use of your home.
If the business is a daycare: know the percentage of time that part of your home is used for daycare.
Figuring the amount of deduction under Simplified Method
Multiply the allowable area by $5
Subtract the expenses from the business that are not related to the business use from the gross income related to the business use of the home. (a)
If expenses are greater than the gross income from business use of the home, you cannot take a deduction for this business use of the home. (b)
The smaller of amounts (a) or (b) is what you can deduct for this qualified business use of your home using the simplified method.
Disclaimer
The information provided is for general informational purposes only and does not constitute professional tax, legal, or accounting advice. Tax laws and regulations are complex and subject to interpretation, and their application can vary based on individual circumstances. Always consult a qualified tax professional or advisor to discuss your specific situation before making any tax-related decisions. Neither the author nor the platform assumes any liability for errors, omissions, or for any outcomes related to the use of this information.
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