Business deductions are necessary business expenses that the government won’t charge taxes on. However, despite a large number of small business tax deductions out there, there are also many 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.
Remember, what’s considered non-deductible is slightly different 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 partially deduct the same expense.
That’s why it’s important to check in with your accountant, a certified public accountant (CPA) or other tax professional. 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 not deductible.
In some states, you may be able to deduct small portions of your federal income taxes from your state taxes. But as a general rule, don’t even try to deduct taxes from your tax bill.
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.
Others, like extra life or disability 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’re not able to 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 if you were an employee rather than the business owner: If you’d still be paying these expenses, chances are good they’re non-allowable deductions. Traveling to and from home isn’t deductible but traveling to client sites throughout the workday is.
6. Home office
You may be able to deduct home office space but only under very specific circumstances. In most cases, it means that 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 that if your office doubles as your guest room, you probably can’t deduct it. 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 what you can’t deduct. 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 considered non-deductible expenses. Sometimes, these expenses overlap, 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 deductible for most businesses. But what if you’re a sole proprietorship, 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 get a law changed that would help your business. Or you support a candidate whose platform would help your industry. It may feel like you’re investing in your business, but any contributions 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. Meals and entertainment
While some meals can get written off, the IRS has criteria for what is and isn’t allowed. For example, suppose you treat your employees to lunch or have a weekly team bonding activity. In that case, you can likely deduct only 50% of the entire cost. However, certain exceptions, such as snacks in the break room, might be completely deductible.
Generally, you can’t deduct entertainment expenses, 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.
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.
13. 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.
14. 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.
15. Club memberships
If you travel a lot for business, you may want to join hotel membership clubs. 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.
16. 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, then 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.
How NEXT helps small business owners
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Our licensed, U.S.-based insurance professionals can help if you have questions during the process.
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