Understanding Non-Deductible Business Expenses: 13 Common Examples
Business expenses are the daily costs of operating your company, from conventional utilities, such as electricity and water, to employee wages to federal and local taxes.
Business deductions exclude necessary expenditures from taxation. However, some costs tied to a company may not qualify as write-offs despite appearing related. Typically, expenses deemed indirectly business-related or unnecessary cannot reduce taxable income. A tax deduction, also known as a “tax write-off,” is an expense that can be subtracted from your taxable income, therefore reducing the amount of tax you owe.
The government distinguishes between deductible and non-deductible expenses. While many legitimate business costs merit tax deductions, owners sometimes incorrectly assume non-qualifying outlays are write-offs too. But only directly necessary operational spending qualifies.
Understanding Deductible vs. Non-deductible Business Expenses
So business owners must carefully differentiate between deductible expenses and non-deductible costs that seem affiliated but do not directly sustain business activities. Miscategorizing non-qualified expenses risks IRS scrutiny, as the tax agency expects documented justification for all deductions.
Business expenses fall into two categories – deductible and non-deductible. Deductible expenses can be subtracted from business income when filing taxes, lowering taxable profits. This reduces the tax burden. Non-deductible expenses cannot be written off, so they are included in taxable income. Thus, taxes must be paid on non-deductible costs.
Distinguishing between these types is critical for proper tax filing and avoiding issues with the IRS. While owners want to deduct all business-related costs, the government draws clear lines around qualifying expenditures. Only directly necessary operational expenses merit write-offs. Any peripheral or excessive outlays remain taxable.
With complex tax codes, business owners benefit from working with an accountant to categorize expenses appropriately. Thoughtful documentation also provides justification if any deductions raise questions. Carefully differentiating deductible and non-deductible costs ensures accurate tax returns.
13 common examples of non-deductible expenses
In this helpful article published in Next Insurance, they list out 13 business expense examples that are not tax deductible:
- Fines and Penalties
- Capital Expenses (the cost needed to launch a business)
- Personal and family expenses
- Political contributions
- Gifts up to $25
- Legal Fees
- Certain meals
- Business entertainment expenses
- Suits business attire
- Club memberships
- Travel expenses for additional travelers
- Commuting costs
1 Fines and penalties
Most fines are not considered tax write offs. Such as fines and penalties which 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.
While there are some types of business insurance premiums may be tax deductible, depending on local regulations and your insurance policy. In general 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.
3 Capital expenses and equipment
Capital expenses are business costs providing over one year of usefulness, like vehicles, office furniture, land, or franchise rights. Though some startup outlays may qualify for deductions up to $5,000, capital expenditures cannot directly offset taxable income.
These asset investments cannot be deducted in the year purchased. However, businesses can potentially deduct a portion annually as the items depreciate. The complex distinction between immediately deductible and capital expenses underscores the value of expert guidance on write-offs.
4 Personal and family expenses
Expenses lacking a primary business purpose typify non-deductible costs. Items with personal use like vehicles or phone lines cannot be written off, even if occasionally used for work.
Similarly, family expenses are never deductible, though some may relate to a home-based business. In these cases, owners must segregate costs between family and business. Only the portion directly tied to business operations qualifies for deductions.
The key distinction lies in the primary intent behind the spending. If an expense mainly enables personal or family life, none of it becomes deductible just because incidental business use occurs. Business owners should be cautious claiming deductions where personal and professional overlap. Unless an outlay’s chief purpose fuels business activities, it remains a non-deductible personal cost in the IRS’s eyes.
5 Political Contributions
When elections start picking up, you might be looking to donate or work with your campaign of choice. But are political contributions tax-deductible? Say you want to lobby to change a law to help your business. Or you support a candidate whose platform would help your industry.
Businesses can’t deduct political contributions, donations, on their tax returns. These donations include in-kind donations and advertisements in political convention bulletins.
6 Gifts over $25
Sometimes you may decide to give nice gifts to say thank you for referrals or to show appreciation to 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.
7 entertainment expenses
The Tax Cuts and Jobs Act (TCJA) of 2017 has eliminated entertainment expense write-offs. That means you can’t deduct costs for entertaining clients, even if they are business-related.
As an example, you can’t deduct membership dues from a golf club even if you bring clients out onto the course to discuss business deals. 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.
8 Legal fees
In general, legal fees that are related to your business, including rental properties, can be deductions. According to a Turbotax article, any legal fees that are related to personal issues can’t be included in your itemized deductions. According to the IRS, these fees include:
- Fees related to nonbusiness tax issues or tax advice.
- Fees that you pay in connection with the determination, collection or refund of any taxes.
- Personal legal expenses, including:
- Child custody
- Purchasing real estate
- Breach of promise to marry
- Civil or criminal charges related to personal relationships
- Personal injury
- Title preparation
- Estate planning such as will preparation
- Property claims or settlements
- Fees for defending civil or criminal charges that arise from your participation in a political campaign
9 Certain meals
Read IRS rules about which meals can be written off.
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 reward your workers out 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.
10 Suits business attire
It may seem like you should be able to deduct the cost of a suit you bought for an important client meeting or conference, but unfortunately suits aren’t at all deductible. Professional clothes such as suits or work dresses can be worn to events outside of the business, therefore you can’t deduct the cost.However, taxpayers who wear a branded uniform or special safety clothing probably can.
11 Club memberships
You may want to join hotel membership clubs if you travel a lot for business. Or, it may be worthwhile to join a coworking space, country clubs or other social clubs where local business networking is done. However, as mentioned in the entertainment section, these are non-deductible expenses.
12 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.
13 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.
The Consequences of Misclassifying Expenses
Incorrectly categorizing expenses can trigger penalties or extra tax bills. The key criteria for write-offs are that costs must be both ordinary and necessary for the business. Ordinary means commonly accepted expenses in an industry. Necessary denotes costs helpful and appropriate for operations. Anything beyond this typically falls short of deductions.
For example, street clothes for remote work would not qualify, while protective gear, boots, tool belts, and helmets for construction reflect ordinary and necessary costs. This work attire satisfies the deductibility standards for that industry.
The IRS scrutinizes vague deductions lacking clear business purpose. Owners should take care to properly classify expenses, retaining documentation demonstrating ordinary necessity. With complex tax codes, consulting a professional helps maximize qualified deductions while avoiding missteps.
Navigating the tax rules of understanding the deductibility of expenses can sometimes feel overwhelming. But don’t worry. If you ever find yourself needing further clarification on specific expenses, never hesitate to reach out to Huckabee CPA for a free consultation.