Tax Guide 2025–2026

Key 2025–2026 Updates & Permanent Changes

• Bonus Depreciation: For qualified business property placed in service after January 19, 2025, businesses can now deduct 100% of the cost in the first year.
• Section 179 Limits: The maximum deduction for immediate expensing of business assets increased to $2.5 million for 2025, with a phase-out threshold starting at $4 million.
• Standard Mileage Rate: For 2026, the rate for business use of a vehicle is 72.5 cents per mile.
• QBI Deduction: The 20% Qualified Business Income (QBI) deduction for qualified active trades or businesses has been made permanent.
• Excess Business Loss: The limitation on deducting excess business losses is now permanent, with thresholds indexed for inflation after 2025.

Business vs. Personal Expense Rules

The IRS generally prohibits deducting personal, living, or family expenses. When an expense serves both purposes, you must allocate the cost and only deduct the business portion.

Recordkeeping Recommendations

• Separate Accounts: Maintain separate bank and credit card accounts for business and personal finances to ensure clear records.
• Documentation: Keep detailed logs for mixed-use items like phones or vehicles to substantiate the “business use” percentage.
• Home Office Calculation: You can use the IRS Simplified Option ($5–$6 per sq. ft. up to 300 sq. ft.) or track actual expenses (mortgage interest, utilities, repairs).

Deduction rules remain focused on “exclusive and regular” use.

2026 Standard Mileage Rates

Taxpayers can use these optional rates to calculate the deductible costs of operating a vehicle for business, medical, or charitable purposes.

• Business: $0.725 per mile (up from $0.70 in 2025).
• Medical: $0.205 per mile (down from $0.21 in 2025).
• Moving (Military/Intelligence Only): $0.205 per mile.
  • This is restricted to active-duty Armed Forces moving under orders and certain members of the intelligence community.
• Charitable: $0.14 per mile (fixed by statute).

Depreciation Component: For those using the business standard rate, the portion treated as depreciation is $0.35 per mile for 2026.

Home Office Deduction

This deduction is available only to self-employed individuals (freelancers, contractors); W-2 employees generally cannot claim it. You must choose between two calculation methods:

1. Simplified Method

• Rate: $5 per square foot of qualified home office space.
• Cap: Maximum of 300 square feet, resulting in a maximum $1,500 deduction.
• Pros: Requires no tracking of actual home expenses (utilities, insurance).
• Cons: No depreciation deduction is allowed.

2. Regular (Actual Expense) Method

• Calculation: Based on the percentage of your home used for business (e.g., 200 sq. ft. office in a 2,000 sq. ft. home = 10%).
• Deductible Costs: You deduct that same percentage of indirect expenses, such as:
  • Mortgage interest or rent.
  • Utilities (electricity, gas, water) and trash services.
  • Homeowners/renters insurance and real estate taxes.
  • General repairs and depreciation.
• Direct Expenses: Costs for only the office (e.g., painting the office walls) are 100% deductible.

Eligibility Requirements

To qualify, your space must meet two strict IRS tests:

• Exclusive Use: The area must be used only for business. If the space is also used for personal activities (like a guest room or kids’ homework), it generally does not qualify.
• Regular Use: You must use the space for business on a recurring basis, not just occasionally.
• Principal Place of Business: It must be your primary location for business or where you regularly meet clients. It also qualifies if you use it for administrative tasks and have no other fixed location for those duties.