Irs Tax Guide

Mixed business/personal expenses: separate the personal part (not deductible) from the business part.

Accounting Methods

Small business taxpayer exception: If average annual gross receipts for prior 3 years are $31 million or less and not a tax shelter, you may:

• Use cash method even with inventory
• Treat inventory as non-incidental materials and supplies
• Be exempt from uniform capitalization rules

Changing methods: Requires IRS approval via Form 3115.

Self-Employment Tax

• SE tax rate: 15.3% (12.4% Social Security + 2.9% Medicare) on net earnings
• Social Security wage base (2025): $176,100 (only the 12.4% portion caps)
• Medicare: No cap; Additional Medicare Tax of 0.9% on SE income over $200,000 (single) / $250,000 (MFJ)
• Deduction: You can deduct the employer-equivalent portion (50% of SE tax) on Form 1040
• Estimated tax: Required if you expect to owe $1,000 or more; pay via Form 1040-ES quarterly

Section 179 Deduction (2025)

• Maximum deduction: $2,500,000
• Phase-out threshold: Begins when total cost of Sec 179 property placed in service exceeds $4,000,000
• Dollar-for-dollar reduction: Deduction reduced by amount exceeding $4,000,000
• Must have taxable income: Cannot create or increase a net loss
• Applies to: Tangible personal property, off-the-shelf software, qualified improvement property, certain listed property used >50% for business
• Does NOT apply to: Real property (generally), property used outside the US, property acquired from related parties, air conditioning/heating units

Bonus Depreciation (2025)

• Rate: 40% for property placed in service in 2025 (phasing down: was 60% in 2024, will be 20% in 2026, 0% in 2027+)
• Applies to: New and used property with recovery period of 20 years or less, computer software, qualified improvement property
• No taxable income limit (unlike Sec 179)
• Election out: Can elect not to claim on a class-by-class basis

De Minimis Safe Harbor

• With applicable financial statement: Deduct amounts up to $5,000 per item or invoice
• Without applicable financial statement: Deduct amounts up to $2,500 per item or invoice
• Must make annual election on tax return

Start-Up and Organizational Costs

• Deduction in first year: Up to $5,000 of start-up costs and $5,000 of organizational costs
• Phase-out: $5,000 deduction reduced dollar-for-dollar when total costs exceed $50,000
• Remaining costs: Amortize over 180 months (15 years) beginning with the month business begins
• Start-up costs include: Market surveys, advertising for opening, wages for training employees, travel to set up business, consultant fees
• NOT start-up costs: Interest, taxes, research and experimental costs

Major Deductible Business Expense Categories

Non-Deductible Items

• Fines and penalties from law violations
• Political contributions
• Lobbying expenses (with limited exceptions)
• Personal expenses (clothing unless required uniform, commuting, etc.)
• Capital expenditures (must depreciate/amortize)
• Demolition costs or losses (add to basis of land)

Information Return Requirements

• Form 1099-NEC: Payments of $600+ to non-employees; due January 31
• Form 1099-MISC: Rents, royalties, prizes, medical payments of $600+
• Form W-2: Employee wages
• Form 8300: Cash payments over $10,000

2. Home Office Deduction (Pub 587)

For complete details, see ~/Documents/dev/docs/irs-tax-guide/publications/business-use-of-home.md

Qualifying Tests -- Must Meet ALL:

1. Exclusive use: Area used ONLY for business (not also as a guest room, playroom, etc.)
2. Regular use: Used on a continuing basis (not occasional or incidental)
3. One of the following:
   • Principal place of business (including management/administrative activities if no other fixed location)
   • Place where you meet clients/customers/patients in the normal course of business
   • Separate structure used in connection with business

Exceptions to exclusive use:

• Storage of inventory/product samples (if home is the only fixed business location)
• Licensed daycare facility

Employees: Under TCJA (2018-2025), employees CANNOT deduct home office expenses (unreimbursed employee expenses eliminated). This applies only to employees, NOT self-employed individuals.

Simplified Method

Regular (Actual Expense) Method

Business percentage -- Calculate using either:

• Square footage of business area / total home square footage
• Number of rooms used for business / total rooms (if rooms approximately equal size)

Deductible expenses (apply business percentage to indirect expenses):

Deduction limit (ordering rules):

1. Business expenses NOT related to home use (deduct first, no limit)
2. Mortgage interest + real estate taxes (business % -- deductible even without home office)
3. Operating expenses (insurance, utilities, repairs) -- limited to remaining gross income
4. Depreciation -- limited to remaining gross income after operating expenses

Carryover: Excess expenses from Group 3 and 4 carry forward to next year (subject to that year's limit).

Home depreciation: Residential property depreciated over 39 years (straight-line) for the business-use portion. Basis = lesser of (adjusted basis of home OR FMV at time of conversion to business use).

Sale of Home with Home Office

• If office is within the home (not a separate structure): Can exclude up to $250,000/$500,000 gain under Sec 121
• Must recapture depreciation allowed or allowable (taxed at 25% rate, max)
• Separate structure: Must allocate gain; business portion may not qualify for exclusion

Where to Deduct (Self-Employed)

• Schedule C filers: Use Form 8829 (actual) or Simplified Method Worksheet in Schedule C instructions
• Schedule F filers: Use Pub 587 worksheet
• Partners: Deduct on Schedule E as unreimbursed partnership expense (if required by partnership agreement)

3. Travel, Meals, Gifts, and Car Expenses (Pub 463)

For complete details, see ~/Documents/dev/docs/irs-tax-guide/publications/travel-gift-car-expenses.md

Travel Expenses (Away from Home)

Tax home = Your regular place of business (NOT necessarily where your family lives). If you have multiple work locations, your tax home is your main place of business considering:

• Time spent at each location
• Business activity at each location
• Income from each location

"Away from home" = Your duties require you to be away from your tax home substantially longer than an ordinary day's work AND you need sleep or rest.

Temporary vs. indefinite assignment:

• Temporary (expected to last 1 year or less): Travel expenses deductible
• Indefinite (expected to last more than 1 year): Tax home shifts; no travel deduction
• If initially temporary but later expected to exceed 1 year: Becomes indefinite on date of changed expectation

Deductible travel expenses:

• Transportation (airfare, train, bus, car)
• Lodging
• Meals (subject to 50% limit)
• Baggage and shipping
• Dry cleaning and laundry
• Tips
• Business calls and communications
• Other ordinary and necessary expenses

Business Meals

Currently deductible at 50%:

• Meals with clients, customers, or business associates where business is discussed
• Meals while traveling away from home on business
• Meals at business conventions or seminars

NOT deductible:

• Entertainment expenses (post-TCJA: tickets to sporting events, theater, golf, etc.)
• Lavish or extravagant meals (not reasonable under circumstances)
• Meals included in compensation reported on employee's W-2

Exceptions to 50% limit (100% deductible):

• Meals treated as compensation to employees
• Recreational expenses for ALL employees (e.g., holiday parties, picnics)
• Meals included in advertising/promotional activities open to public
• Meals sold to customers (food business)

Substantiation for meals: Must record: (1) amount, (2) date/place, (3) business purpose, (4) business relationship of persons present.

Standard meal allowance: Can use per diem rates instead of tracking actual meal costs. Per diem rates vary by location; find current rates at GSA.gov/travel/plan-book/per-diem-rates.

Transportation workers: Special meal allowance rate of 80% (instead of 50%) for workers subject to DOT hours-of-service limits.

Business Gifts

• Limit: $25 per person per tax year
• Incidental costs (engraving, gift wrapping, shipping): NOT counted toward $25 limit
• Exceptions to $25 limit: Items costing $4 or less with business name permanently imprinted; signs, display racks, or promotional materials
• Gifts to spouse of client: Count toward that client's $25 limit (unless independent business relationship with spouse)
• Gift vs. entertainment: If you give a client tickets to an event and DO NOT attend, treat as a gift (subject to $25 limit). If you attend with them, it is entertainment (not deductible post-TCJA).

Car Expenses

Standard Mileage Rate

To use standard mileage rate, you MUST:

• Choose it in the FIRST year the car is available for business use
• Not use five or more cars simultaneously
• Not have claimed MACRS depreciation, Sec 179, or bonus depreciation on that car
• Not have claimed actual expenses after 1997 on a leased car

Standard mileage rate includes: Gas, oil, repairs, insurance, registration, depreciation Standard mileage rate does NOT include (deduct separately): Parking fees, tolls, interest on car loan (if self-employed)

Actual Expense Method

Deductible costs (multiply total by business-use %):

• Gas and oil, repairs, tires, insurance, registration, licenses
• Depreciation (subject to luxury auto limits)
• Lease payments (subject to inclusion amount)
• Garage rent, parking, tolls

Luxury auto depreciation limits (2025):

• Year 1: $12,400 (or $20,400 with bonus depreciation)
• Year 2: $19,800
• Year 3: $11,900
• Year 4+: $7,160

Heavy SUVs/trucks (GVWR > 6,000 lbs): Section 179 deduction capped at $31,300 for SUVs; no luxury auto limits for vehicles over 6,000 lbs that are NOT SUVs (trucks, vans).

Recordkeeping and Substantiation

Must prove: Amount, time/date/place, business purpose, business relationship

Adequate records include: Account book, diary, log, statement of expense, trip sheet, or similar record made at or near the time of the expense, supported by documentary evidence.

Documentary evidence: Receipts, canceled checks, bills. Required for expenses of $75 or more (and all lodging expenses regardless of amount).

Timely record: Record elements at or near the time of expenditure. A contemporaneous log maintained at or near the time has more value than a reconstruction of expenses.

4. Investment Income and Expenses (Pub 550)

For complete details, see ~/Documents/dev/docs/irs-tax-guide/publications/investment-income-expenses.md

Interest Income

• Taxable: Bank accounts, CDs, money market funds, bonds, Treasury securities, seller-financed mortgage interest
• Tax-exempt: State and local government bond interest (but report on return; may affect other calculations like SS taxation and NIIT)
• Treasury obligations: Taxable for federal; exempt from state/local tax
• Series I and EE bonds: Can defer reporting interest until redemption or maturity; or elect to report annually
• Education Savings Bond Program: Series EE/I bond interest may be excludable if used for qualified higher education expenses (income limits apply)

Dividend Income

Ordinary dividends: Taxed at regular income tax rates.

Qualified dividends: Taxed at preferential capital gains rates (0%, 15%, or 20%). Requirements:

• Paid by a U.S. corporation or qualified foreign corporation
• Holding period: Must hold stock for more than 60 days during the 121-day period beginning 60 days before ex-dividend date
• For preferred stock with dividends attributable to periods over 366 days: Must hold more than 90 days during the 181-day period

Dividends that are NOT qualified: Money market fund dividends, short-sale dividends, dividends on stock held less than required period, dividends from tax-exempt organizations, dividends on employee stock ownership plans.

Capital Gains and Losses

Holding period:

• Short-term: Held 1 year or less -- taxed as ordinary income
• Long-term: Held more than 1 year -- preferential rates apply
• Holding period starts day AFTER acquisition; includes the day of sale/disposition

Maximum capital gains tax rates (2025):

0%/15%/20% rate thresholds (2025 taxable income):

Capital loss deduction: Net capital losses deductible up to $3,000/year ($1,500 if MFS). Excess carries forward indefinitely.

Netting rules: Short-term gains/losses netted first; long-term gains/losses netted separately. Net short-term losses offset net long-term gains first, and vice versa.

Wash Sale Rules

Rule: You CANNOT deduct a loss on the sale of stock or securities if, within 30 days before OR after the sale, you:

1. Buy substantially identical stock or securities
2. Acquire substantially identical stock in a fully taxable trade
3. Acquire a contract or option to buy substantially identical stock
4. Acquire substantially identical stock for your IRA or Roth IRA

Key points:

• Applies to stock sold by you and bought by your spouse or controlled corporation
• Disallowed loss is added to the basis of the replacement stock (loss is postponed, not lost forever)
• Holding period of the replacement stock includes the holding period of the old stock
• Exception for IRA acquisitions: Disallowed loss is NOT added to IRA basis (loss is permanently lost)
• Does NOT apply to commodity futures contracts or foreign currencies
• 61-day window: The wash sale period is 30 days before through 30 days after the sale date

Substantially identical: Stocks of different corporations are generally NOT substantially identical. Convertible preferred stock may be substantially identical to common stock of the same corporation depending on conversion terms.

Short Sales

• Gain/loss timing: Recognized when short sale is closed (not when opened)
• If you held substantially identical property >1 year on date of short sale: Any loss is long-term, regardless of how long the short sale was open
• If you held substantially identical property 1 year or less: Any gain is short-term; holding period of the identical property restarts

Net Investment Income Tax (NIIT)

• Rate: 3.8% on lesser of (a) net investment income OR (b) MAGI exceeding threshold
• MAGI thresholds: $250,000 (MFJ), $200,000 (Single/HoH), $125,000 (MFS)
• Net investment income includes: Interest, dividends, capital gains, rental/royalty income, passive activity income, income from trading financial instruments/commodities
• Excludes: Wages, SE income, Social Security, tax-exempt interest, distributions from qualified retirement plans/IRAs
• Reported on: Form 8960

Investment Expenses

• Investment interest expense: Deductible up to net investment income. Excess carries forward. Elect to include qualified dividends/LTCG in investment income to increase deduction (but they lose preferential rates).
• Margin interest: Deductible as investment interest expense (Schedule A if itemizing)
• Advisory fees, safe deposit boxes, investment publications: NOT deductible 2018-2025 (TCJA suspended miscellaneous itemized deductions subject to 2% floor)

5. Retirement Plans for Self-Employed (Pub 560)

For complete details, see ~/Documents/dev/docs/irs-tax-guide/publications/retirement-plans-small-business.md

Key Retirement Plan Rules for 2025

SEP-IRA Details

• Contribution formula: Lesser of 25% of compensation or $70,000
• Self-employed adjustment: Net SE earnings x 0.9235, then multiply by the contribution rate. The effective rate for a 25% plan is approximately 20% of net SE income (use Rate Table in Pub 560 Chapter 5)
• All eligible employees must receive the same percentage
• Eligible employee: Age 21+, worked for employer in 3 of last 5 years, received at least $750 compensation in the year
• No employee contributions (unless grandfathered SARSEP)
• Can have alongside IRA: Yes, but SEP contributions reduce traditional IRA deduction eligibility
• Roth SEP IRA: Available for tax years beginning after 2022 (SECURE 2.0)

Solo 401(k) Details (One-Participant Plan)

• Employee deferral: Up to $23,500 (2025); $31,000 if age 50+ (not 60-63); $34,750 if age 60-63
• Employer contribution: Up to 25% of compensation (20% of net SE income for self-employed after adjustment)
• Combined maximum: $70,000 ($77,500 with catch-up age 50+; $81,250 with enhanced catch-up age 60-63)
• Roth option: Available for employee elective deferrals
• Loans: Permitted (up to $50,000 or 50% of vested balance)
• 2026 limits: Employee deferral $24,500; total defined contribution $72,000; defined benefit $290,000

SIMPLE IRA Details

• Employee salary reduction: Up to $16,500 (2025)
• Catch-up (age 50+): Additional $3,500 (total $20,000)
• Higher catch-up (age 60-63): Additional $5,250 (total $21,750)
• Higher limit employers: Certain SIMPLE plans allow $18,100 salary reduction (SECURE 2.0)
• Employer match: Dollar-for-dollar up to 3% of compensation (can reduce to 1% for 2 of 5 years)
• Nonelective alternative: 2% of compensation for all eligible employees
• Additional nonelective: Up to 10% of compensation (max $5,100 for 2025) -- SECURE 2.0
• Employer eligibility: 100 or fewer employees earning $5,000+ in prior year; cannot maintain another qualified plan
• 25% early withdrawal penalty: Applies to distributions within first 2 years of participation (instead of normal 10%)

Defined Benefit Plans

• Maximum annual benefit (2025): $280,000 (or 100% of average highest 3-year compensation if less)
• Contribution: Actuarially determined; no statutory cap on contributions, only on benefit
• Best for: Older self-employed individuals with high income who want to maximize deductions
• Complexity: Requires actuary; annual Form 5500 filing; PBGC premiums may apply

Deduction Calculation for Self-Employed

Self-employed individuals must use the iterative calculation:

1. Start with net profit from Schedule C
2. Subtract 50% of SE tax
3. Apply the plan contribution rate (adjusted for self-employment -- use Pub 560 Rate Table or Rate Worksheet)

Where to deduct: Schedule 1 (Form 1040), line 16 (self-employed SEP, SIMPLE, and qualified plans)

6. Health Savings Accounts (Pub 969)

For complete details, see ~/Documents/dev/docs/irs-tax-guide/publications/health-savings-accounts.md

HSA Triple Tax Advantage

1. Contributions: Tax-deductible (above-the-line, no itemizing required)
2. Growth: Tax-free earnings
3. Distributions: Tax-free if used for qualified medical expenses

Eligibility Requirements

Must meet ALL:

• Covered under a High Deductible Health Plan (HDHP)
• No other health coverage (exceptions: dental, vision, specific disease, fixed-amount plans, telehealth)
• NOT enrolled in Medicare
• Cannot be claimed as a dependent on another person's return

HDHP Requirements (2025)

2026 HDHP Requirements:

HSA Contribution Limits

Key rules:

• Married couples: Each spouse must have their own HSA (no joint HSAs)
• Both spouses with family HDHP coverage: Combined contributions cannot exceed family limit; split between accounts however they choose
• Last-month rule: If eligible on December 1, treated as eligible for the entire year (but must remain eligible through the following December 31 testing period, or include excess in income + 10% penalty)
• Employer contributions: Included in the annual limit; excluded from employee income; not subject to employment taxes
• Contribution deadline: Tax return filing deadline (April 15, no extensions)

Qualified Medical Expenses

• Medical, dental, vision expenses for account holder, spouse, and dependents
• Prescription drugs and insulin
• Long-term care insurance premiums (limited by age-based amounts)
• COBRA premiums
• Health insurance premiums while receiving unemployment compensation
• Medicare premiums (Parts A, B, D, Medicare Advantage) -- only if age 65+
• NOT qualified: Cosmetic surgery, general health items, most insurance premiums (unless noted above)

Non-Qualified Distributions

• Included in gross income
• Subject to 20% additional tax (penalty)
• Exceptions to penalty: Age 65+, disability, death
• After age 65: Non-qualified distributions taxed as income but NO penalty (HSA functions like a traditional IRA)

Health FSA (2025)

• Employee salary reduction limit: $3,300
• Maximum carryover: $660 to next year
• Use-it-or-lose-it: Employer may offer grace period (2.5 months) OR carryover, but not both

7. IRA Contributions (Pub 590-A)

For complete details, see ~/Documents/dev/docs/irs-tax-guide/publications/ira-contributions.md

Contribution Limits

• Limit applies to COMBINED traditional + Roth IRA contributions
• Must have earned income (compensation) at least equal to contribution
• Contribution deadline: Tax return due date (typically April 15; extensions do NOT extend)

Traditional IRA Deductibility

If NOT covered by employer plan: Fully deductible regardless of income.

If covered by employer plan (2025 MAGI phaseouts):

If spouse is covered but you are NOT (2025):

Roth IRA Contribution Limits (2025 MAGI Phaseouts)

Spousal IRA (Kay Bailey Hutchison)

• Non-working or low-earning spouse can contribute up to the annual limit
• Based on the working spouse's compensation (minus the working spouse's own IRA contribution)
• Must file jointly
• Each spouse maintains their own separate IRA

Backdoor Roth IRA Strategy

For high-income taxpayers who exceed Roth IRA income limits:

1. Make a nondeductible contribution to a traditional IRA (no income limit on contributions, only on deductibility)
2. Convert the traditional IRA to a Roth IRA (no income limit on conversions)
3. Pay tax on any gains between contribution and conversion

Pro-rata rule WARNING: If you have ANY pre-tax money in ANY traditional, SEP, or SIMPLE IRA, the conversion is taxed proportionally across ALL IRA balances (not just the nondeductible portion). The IRS aggregates ALL your traditional IRAs for this calculation.

Form 8606: MUST be filed to track nondeductible contributions; $50 penalty for failure to file.

No recharacterization of conversions: Since 2018, conversions from traditional to Roth cannot be reversed.

Excess Contributions

• Penalty: 6% excise tax per year on excess amounts remaining in the IRA
• Correction before tax return due date (including extensions): Withdraw excess + net income attributable; no 6% penalty; earnings taxed in year of contribution
• Correction after due date: Withdraw and apply to next year's contribution; 6% penalty applies for each year excess remains
• Applying to future years: Excess can be absorbed by future year's contribution limit (still pay 6% for each year it remained excess)

Roth IRA Special Rules

• No RMDs during owner's lifetime (unlike traditional IRAs)
• Contributions (not earnings) can be withdrawn at any time, tax-free and penalty-free
• 5-year rule for earnings: Earnings are tax-free only after 5 tax years from first Roth contribution AND age 59.5 (or death/disability/first-home $10K)
• 5-year rule for conversions: Each conversion has its own 5-year period for avoiding 10% early withdrawal penalty on the converted amount (if under 59.5)
• 529-to-Roth rollover: Beginning 2024, up to $7,000/year from 529 to beneficiary's Roth IRA (529 must have been open 15+ years; lifetime cap $35,000)

8. Basis of Assets (Pub 551)

For complete details, see ~/Documents/dev/docs/irs-tax-guide/publications/basis-of-assets.md

Cost Basis

Basis = Purchase price + the following capitalized costs:

• Sales tax, freight, installation, testing
• Legal and accounting fees related to acquisition
• Recording fees, transfer taxes, revenue stamps
• Real estate taxes assumed for the seller (prorated to date of sale)
• Settlement fees and closing costs (title insurance, surveys, legal fees)
• NOT included: Deductible points on home mortgage, costs connected with getting a loan

Adjusted Basis

Increases to basis: Capital improvements, assessments for local improvements (sidewalks, roads), legal fees to defend title, zoning costs, restoration after casualty.

Decreases to basis: Depreciation allowed or allowable, casualty/theft loss deductions, insurance reimbursements, Section 179 deductions, credits (vehicle, residential energy), nontaxable corporate distributions (return of capital), easements granted.

Basis of Property Received as a Gift

If FMV >= donor's adjusted basis at time of gift:

• Your basis = donor's adjusted basis + part of gift tax paid attributable to net appreciation
• For determining gain AND loss

If FMV < donor's adjusted basis at time of gift:

• For gain: Your basis = donor's adjusted basis
• For loss: Your basis = FMV at time of gift
• If you sell between these two amounts: No gain or loss recognized

Holding period: If your basis is determined by donor's basis, include the donor's holding period (tack on). If basis is FMV, holding period starts on date of gift.

Basis of Inherited Property

• General rule: Basis = FMV on date of decedent's death (stepped-up or stepped-down basis)
• Alternate valuation date: If estate elects (Form 706), basis = FMV on date 6 months after death (or earlier disposition date)
• Community property: Both halves of community property get stepped-up basis at first spouse's death
• Joint tenancy (non-spouse): Decedent's fractional share gets stepped-up basis; survivor's share retains original basis
• Qualified joint interest (spouses): Half gets stepped-up basis at first death
• Consistency requirement: Basis of property acquired from a decedent must be consistent with estate tax value (Sec 1014(f))
• IRD (Income in Respect of Decedent): Items like retirement accounts, unpaid compensation do NOT get stepped-up basis

Specific Identification for Stocks and Crypto

• Default method (FIFO): If you cannot identify which shares were sold, basis is determined using first-in, first-out
• Specific identification: You may identify particular shares sold by (a) specifying to broker at time of sale which lots to sell, or (b) using adequate records to identify shares
• Average basis: Available ONLY for mutual fund shares (and, beginning 2025, for covered digital assets per broker reporting requirements)
• Mutual fund shares: Can use average basis method; once elected, applies to all shares in that account

Property Changed to Business or Rental Use

• Basis for depreciation: Lesser of (adjusted basis at time of conversion) OR (FMV at time of conversion)
• Basis for gain on sale: Adjusted basis (original cost minus depreciation allowed/allowable)
• Basis for loss on sale: Lesser of adjusted basis OR FMV at conversion, minus depreciation

Uniform Capitalization Rules

• Apply to producers of real or personal tangible property and retailers/wholesalers with inventory
• Must capitalize direct costs and allocable portion of indirect costs into basis
• Small business exception (2025): Exempt if average annual gross receipts $31 million or less (3-year average) and not a tax shelter

Quick Reference: Key 2025 Numbers

Full Publication Locations

Disclaimer: This reference is synthesized from IRS publications for tax year 2025. Tax law changes frequently. Always verify current rules at IRS.gov and consult a qualified tax professional for specific situations. Numbers labeled "TBD" for 2026 are subject to inflation adjustments not yet announced or not found in the source publications.