As you complete your business taxes, you may be gathering information and wondering what's deductible and what's not.
First, to state the obvious, you can't deduct an expense if you didn't spend the money. This also means you can't deduct an expense if you don't have the records to show the expense. Keeping good business records is an important part of tax planning.
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. The most common files are for failure to file by the due date and late payment.
- 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, of course; this is just a reminder. For example, you can't deduct money you paid for smuggling illegal substances into the U.S., for money laundering... ou 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. These costs can be depreciated (extended 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. Read more about deducting start-up costs.
- 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. You may deduct state and local sales taxes from on your personal tax return, but not for your business. (See this IRS article on deducting state and local taxes. 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. 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. For example, if you are in an industry group or you pay dues for you and your employees to a professional organization that relates to your business, these dues, and any expenses of membership, may be deductible business expenses. meals and entertainment expenses are a separate deduction category, and are considered separately.
- 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." Read more about gifts, bonuses and awards to employees for more on this subject.
- Business clothing (except uniforms). The 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.
- Home Office Space. You cannot deduct home office space costs from your business taxes unless you meet very strict IRS criteria; the space must be used regularly and exclusively for business purposes. For example, even if you use a bathroom for your day care children, you can't deduct the space unless it is never used by your family. Read more about deducting home office space.
- 50% of meal and entertainment expenses. You can deduct only 50% of these expenses. The other 50% is non-deductible.
Business Expenses You CAN Deduct
There are many expenses you can deduct on your business tax return, to lower your profit and keep your tax bill low. Read this list of Tax Deductions A to Z to get some ideas on what you might be able to deduct.
A disclaimer The information in this article and on this GuideSite is intended for general information purposes only. I am not a CPA or tax professional, and I do not give tax advice. Each situation is different; consult your tax advisor before you claim deductions or take any action on business taxes.