Business deductions are necessary business expenses that the government won't charge taxes on. However, despite the many small business tax deductions out there, there are also costs that you may associate with your business, but the government has decided they are non-deductible expenses.
Usually, you can't write them off because they're not directly business-related or they're not strictly necessary. So, unfortunately, you cannot use these costs to lower your taxable income.
What’s considered a deductible expense?
The Internal Revenue Service (IRS) considers a deductible expense as an ordinary and necessary cost in your line of work. While the expense doesn't have to be indispensable to operating your business, a necessary expense is considered helpful and appropriate for your business.
Even though a business expense might be common, helpful and appropriate, you still may not be allowed to deduct it. Depending on what it is, you might only be able to deduct part of the expense to reduce your tax liability.
What's considered non-deductible varies in every state and city. Some places will allow you to deduct expenses that others consider completely non-deductible business expenses. Other places will allow you to deduct the same expense partially.
That's why checking in with your accountant, a certified public accountant (CPA) or other tax professional is important. You can also research local regulations if you're unsure what counts as a non-deductible expense vs. deductible expense.
Generally, the following expenses are non-deductible expenses.
- Certain taxes
- Fines and penalties
- Insurance
- Capital expenses and equipment
- Commuting costs
- Home office
- Personal and family expenses
- Charitable contributions
- Political contributions
- Anything illegal
- Gifts over $25
- Certain meals
- Business entertainment expenses
- Business wear
- Legal fees
- Club memberships
- Travel expenses for additional travelers
1. Certain taxes
It's confusing; as a small business owner, some taxes are deductible, and some aren't. But as a general rule, don't try to deduct federal income taxes from your tax bill.
In some states, you may be able to deduct small portions of your federal income taxes from your state taxes. Currently, five states allow this deduction: Alabama, Iowa, Missouri, Montana and Oregon. Louisiana removed this deduction starting in tax year 2022.
Generally, the IRS allows four types of deductible non-business taxes:
- State, local and foreign income taxes
- State and local general sales taxes
- State and local real estate taxes, and
- State and local personal property taxes
Deducting state, local and foreign income taxes has limitations. Corporations and partnerships can deduct these taxes as business expenses. Self-employed individuals filing with a personal return can only deduct state tax if they itemize their deductions.
2. Fines and penalties
Sorry, you won’t be able to write these off. The most common fines and penalties are late fees on federal and state tax returns. These, along with parking tickets, safety violation fees and any other fines, are non-tax-deductible expenses.
3. Insurance
While some business insurance premiums may be tax deductible, depending on local regulations and your insurance policy. Generally, coverage like general liability or workers’ comp insurance is deductible.
Others, like disability insurance or life insurance, probably aren’t, whether they’re for you or your employees.
4. Capital expenses and equipment
A capital expense is a cost needed to launch a business and will benefit your business for longer than a year. These might include a car, office furnishings, land or franchise rights.
While you may be able to deduct some of your startup costs — generally up to $5,000 — you cannot deduct capital expenditure. Talk to an expert in deductible and non-deductible expenses about what is considered a capital expense and whether you can deduct costs as the item depreciates.
5. Commuting costs
Imagine being an employee rather than a business owner: If you'd still be paying these commuting expenses, chances are good they're non-allowable deductions.
The IRS does not consider traveling to and from home deductible, but traveling to client sites throughout the workday is. Traveling between business locations is also deductible.
6. Home office
You may be able to deduct home office space only under specific circumstances. In most cases, you must use a space exclusively for your work. It doesn't need to be a separate room, but it has to be an area in your home where you don't do anything else.
That means you probably can't deduct it if your office doubles as your guest room. Still, if it's a dedicated corner in your basement, that's deductible.
7. Personal and family expenses
This is pretty much the definition of non-deductible expenses. If the expense’s primary use is not for your business, such as a car or phone line, then it’s a personal expense and can’t be deducted.
Likewise, family expenses are not deductible. Sometimes, such expenses overlap with business activity, such as home-based businesses where you use a family car. However, you’ll have to separate associated expenses between family and business; only the portion incurred for business is deductible.
8. Charitable contributions
While charitable contributions are deductible for individuals (via Schedule A form), they aren't for most businesses. But what if you're a sole proprietor, filing your business with your personal income tax return?
Sorry, contributions aren’t deductible because sole proprietors must file taxes on a Schedule C form. The IRS would view this as a personal expense paid for using business funds.
It’s the same for a single-member limited liability company (LLC). Because they are separate entities, corporations may take deductions on their behalf.
9. Political contributions
Suppose you're lobbying to change a law to help your business. Or you support a candidate whose platform would help your industry.
You may feel like you're investing in your business. However, any political contributions or lobbying expenses are still not tax-deductible.
10. Anything illegal
You can’t deduct bribes, kickbacks, salaries paid to people who can’t work legally, or any material you may have paid to smuggle into the country. Of course, we strongly recommend that you don’t do any of those things in the first place. Breaking the law is a bad idea for reasons far beyond tax deductions.
11. Gifts over $25
Sometimes you may give more expensive gifts to say thank you for referrals or to recognize a good business partnership. However, you’ll only be able to deduct up to $25. Anything else you spend is in the category of non-allowable deductions.
12. Certain meals
This is kind of tricky. While some business meals can get written off, the IRS has criteria for what is and isn’t allowed.
IMPORTANT: You can deduct 100% of your meal expenses if the meals are food and beverages provided by a restaurant and paid or incurred after December 31, 2020, and before January 1, 2023. See the IRS’s guidance on this temporary deduction.
For example, suppose you treat your employees to lunch or have a weekly team bonding activity. In that case, you can likely deduct 50% of the entire cost.
However, certain exceptions, such as snacks in the break room, might be completely deductible as they’re considered employee expenses.
Business meals at entertainment events are partially deductible if you separate the meal costs from the entertainment costs. Most of the time, you can deduct 50% of the cost of business meals if:
- The business owner or employee is present.
- The cost of the meal or beverages isn't "lavish or extravagant."
- The meal is with a business contact (such as a customer, employee, vendor, or consultant).
- The meal has an "ordinary and necessary" business purpose.
So if you’re on a business trip to meet a vendor, and are in the same neck of the woods where your favorite cousins live, you aren’t able to take your relatives to lunch and write it off.
13. Business entertainment expenses
The 2017 Tax Cuts and Jobs Act has cut entertainment expense write-offs. That means you can’t deduct costs for entertaining clients, even if they are business-related.
For instance, you can’t deduct membership dues from a golf club even if you regularly take clients there to discuss business. Sporting events, concert tickets, resorts and fees for social clubs are now non-deductible expenses.
There are a few exceptions to the rule, though. The IRS allows deductions for some employees’ recreational expenses, such as a holiday party or summer picnic. Also, expenses related to attending business meetings or conventions are deductible.
14. Business wear
If you didn't have business meetings, you might never need to wear a suit, but you still can’t deduct it as a business expense. However, taxpayers who wear a branded uniform or special safety clothing probably can.
15. Legal fees
If you buy property for your business, all the legal fees are non-allowable deductions. You won’t be able to deduct the cost of the land either, but you may be able to deduct the depreciation of the building over time.
16. Club memberships
You may want to join hotel membership clubs if you travel a lot for business. Or, it may be worthwhile to join country clubs or other social clubs where local business networking is done. However, as mentioned in the entertainment section, these are non-deductible expenses.
17. Travel expenses for additional travelers
When you’re traveling for business, many of your expenses are deductible. However, you cannot deduct expenses for traveling companions who aren’t part of the business.
So if your spouse is your business partner, both your airline tickets are deductible. But, if they are not a partner, then only one is deductible. Be sure to keep all your receipts and have your itemized deductions listed on your filings.
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