Question: What are Some Business Expenses I Cannot Deduct?
The IRS allows many legitimate business expenses, to allow you to minimize your business taxes, but there are some business expenses you cannot deduct. Read through this list of non-deductible business expenses to make sure you don't try to deduct them:
Answer:
As you complete your business taxes, you may be gathering information and wondering what's deductible and what's not. This is a list of expenses that are NOT deductible on your business tax return (or your personal return, for that matter):
- Fines and penalties. You can't deduct the fine you paid for not estimating your taxes last year, or underpayment penalties. Or any other fines and penalties related to your federal tax return.
- Political contributions. You can't deduct contributions your business made to a political party or to a candidate. That includes lobbying costs and costs for campaign events. You may contribute to any qualified charity, and there are ways to deduct charitable contributions, but not political ones.
- Illegal activities. You knew that, but I'm just reminding you. For example, you can't deduct money you paid for smuggling illegal substances into the U.S., for services of a prostitute... you get the idea. These illegal activities also include bribes and kickbacks.
- Capital expenses. These expenses are for the purchase of long-term capital assets, like vehicles and equipment. Capital expenses can be depreciated (considered as expenses over the life of the asset), but they can't be deducted in one year. There are some exceptions, for start-up costs, for example, but for the most part capital expenses are not deductible in one year.
- Federal or state income taxes, gift taxes, and other taxes. Your tax bill is not deductible from your federal business tax return. Some states may allow you to deduct a portion of your federal tax bill, but not all. Check with your state or your tax preparer.
- Hobby losses. These are expenses which create a loss in an activity which is mostly a hobby and which is not deemed to be a business. The IRS has guidelines on whether your activity can be considered a business and thus has deductible expenses, or not. Check with your tax preparer for more information on your specific circumstance.
- Club Dues. If you belong to a country club, social club, fitness facility, or other club, your dues are not a deductible business expense. Even if you take clients or customers to this club, the IRS says it's not deductible. You can deduct costs related to a professional business or trade organization directly related to your business.
- Commuting costs. Everyone travels from home to work, and the IRS says these costs are not deductible business expenses. If you travel for business from home to meet customers, that's deductible. Or if you travel between business locations, that's also deductible. But if you get in your car to go to your office and come back at night, that's not deductible.
- Business gifts over $25. The IRS says, "You can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year."
- Business clothing (except uniforms). Costs of buying clothing to wear to work, unless it is a uniform, is not deductible. The "rule of thumb" is that if you can wear it outside of work, it's not deductible.
In addition, note that you can't deduct it if you didn't spend it. That may seem obvious, but you'd be surprised at what people try to deduct.
