Essential Tax Deductions and Depreciation Rules

Posted on Apr 12, 2026 in Accounting and Finance

Business Expense Requirements

Business expenses must be ordinary, necessary, reasonable, and paid or incurred by the taxpayer. You cannot deduct another person’s expenses.

Capital vs. Operating Expenses

  • Capitalize (Depreciate): Improvements that restore property or increase its value.
  • Current Deduction: Repairs and maintenance that keep an asset operating.

Non-Deductible Expenses

  • Illegal bribes and kickbacks.
  • Government fines and penalties.
  • Expenses tied to tax-exempt income.
  • Interest on debt used to purchase tax-exempt securities.

Executive Compensation

Public corporations are limited to a $1,000,000 deduction per executive.

IRAs and Deferred Compensation

Traditional IRA

Early withdrawals (before age 59 1/2) are subject to taxable income plus a 10% penalty.

Required Minimum Distributions (RMD)

  • Born before 1951: Age 72
  • Born 1951–1959: Age 73
  • Born 1960 or later: Age 75

Roth IRA Rules

  • Contributions are not deductible.
  • Qualified withdrawals are tax-free.
  • Contribution limit: $7,000 (+$1,000 for age 50+).
  • Ordering Rule: 1. Contributions (tax-free), 2. Earnings (tax + penalty).

Itemized Deductions and QBI

Medical Expenses

Deductible if unreimbursed and subject to a 7.5% AGI floor. Capital improvements (ramps, etc.) are deductible only for the amount exceeding the increase in property fair market value (FMV).

Taxes (Schedule A)

Deductible: Real property, personal property (value-based), and state/local income or sales tax. Not deductible: Tolls, parking, water/sewer charges.

QBI Deduction

The deduction is the lesser of 20% of QBI or 20% of (Taxable income – net capital gains). Applies to sole proprietorships, partnerships, and S corps.

Depreciation and Amortization

Section 179 and Bonus Depreciation

  • Sec. 179 (2025): Max deduction $2,500,000; phaseout begins at $4,000,000. Not for real property.
  • Bonus Depreciation: Currently 100%, taken after Sec. 179.

MACRS Recovery Periods

  • Residential rental: 27.5 years.
  • Nonresidential real estate: 39 years.

Tax Research and Practice

Court Systems

  1. U.S. Tax Court (no prepayment required).
  2. U.S. District Court.
  3. Court of Federal Claims.

AICPA SSTS Standards

  • SSTS #1: General standards; protect data and inform of errors.
  • SSTS #2: Tax return positions require a realistic possibility of success or reasonable basis with disclosure.
  • SSTS #3: Consulting requires professional judgment regarding complexity and risk.