Federal Tax News for Businesses: July 2025

Summer Interns Can Help Fill Gaps

The labor market is tight. As many employers seek summer interns to fill the gaps, it's critical to comply with federal laws, primarily the Fair Labor Standards Act (FLSA). Paid interns are subject to the FLSA, which includes minimum wage and overtime laws. They're also generally subject to state labor laws, which may require higher pay rates. And of course, you must withhold and pay the appropriate payroll taxes. If you hire minors, you must also follow child labor laws governed by the FLSA. Unpaid interns aren't subject to FLSA provisions involving minimum wages and overtime, but these positions must pass a multi-factor "primary beneficiary test." To learn more click here.

Know How Your Side Hustle Will Be Taxed

Many Americans seek to earn money by way of a side hustle, which sometimes starts as a hobby. The IRS is reminding taxpayers that this income is taxable. Depending on whether the IRS considers the activity to be a business or a hobby, the tax treatment is very different.

On their tax returns, businesses can generally deduct ordinary and necessary business expenses. But if the IRS deems an activity a hobby, deductions are much more limited. To determine if an activity is considered a business, the IRS looks at key factors. These include whether the taxpayer displays a profit motive, operates in a businesslike manner and keeps good records. Click here to learn more from the IRS.

Don't Miss out on Tax Breaks

To help ensure small businesses take advantage of all potential tax breaks, the Taxpayer Advocate Service (TAS) summarizes the types of tax you may owe and provides a list of 10 federal tax tips. View the full list here.

Among the tips are to separate your business and personal finances, which means establishing business-only bank accounts and credit cards. Another TAS tip, directed at startups in particular, is to correctly classify your business. Choosing the appropriate business structure is important because some enjoy greater tax benefits. But perhaps the most important tips are to know when to get tax assistance from a professional and to choose one who's knowledgeable and trustworthy.

Is that Really Deductible?

Business owners can generally deduct ordinary and necessary expenses paid or incurred during the taxable year, provided they can substantiate them. In one case, the U.S. Tax Court denied depreciation deductions claimed by an engineering firm owner for the value of his own time spent developing a program. Self-performed labor isn't "paid or incurred," the court stated, and therefore, not deductible.

The court disallowed other deductions due to insufficient records and lack of a clear business purpose. An accuracy-related penalty was also imposed, with the court noting the taxpayer improperly reduced gross receipts by claiming unsubstantiated customer discounts. (TC Memo 2025-27)

Planning Summer Events for Your Workforce?

Summer is here and you may be planning a picnic or other outing for your employees. When doing so, keep tax deductions in mind. Most entertainment expenses currently aren't deductible, but you can generally deduct 50% of the cost of business meals. Plus, under certain conditions, you can deduct 100% of some party costs. The event must be for your entire staff and not be "lavish or extravagant." Deductible costs include food, beverages, live music and venue rentals. Detailed invoicing and recordkeeping are a must. Before sending out invitations, contact us about maximizing your tax deduction.