Question

Niko is a sole proprietor who runs a coffee shop. His gross revenue for Tax Year 2025 is $112,000. Niko wants to fully deduct the following expenses. Which of these would NOT qualify as an "ordinary and necessary" business expense?
$206 per month for a mobile phone used exclusively for the business.
$2,100 for advertising costs.
$1,500 for gifts given to 30 customers. Each gift is valued at $50.
$38,000 in wage expenses paid to three part-time employees.

Answer 1

The $1,500 for gifts to customers would not fully qualify. Business gifts are limited to a $25 deduction per recipient per year (IRC §274(b)). For 30 customers at $50 each (total $1,500), only $25 × 30 = $750 is deductible; the remaining $750 is nondeductible.

The others are ordinary and necessary and generally deductible for a sole proprietor:
- $206/month mobile phone used exclusively for the business — deductible.
- $2,100 advertising — deductible.
- $38,000 wages to employees — deductible (subject to payroll tax and reporting rules).