Separating deductible and non deductible expenses can be tough. You may find yourself asking: Does this expense go on the personal card or the business card?
For all the lists of valid business expenses, sometimes it’s easier to know what is deductible by knowing what’s non-deductible.
This article will help you avoid commingling funds and maintain the personal asset protection of your LLC by guiding you away from potential non-deductible pitfalls.
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What Are the IRS Rules for Non deductible Business Expenses?
There are many ways businesses can lower their tax liability. We’ve written a comprehensive guide on business expenses and tax deductions, as well as small businesses tax deductions, the home office deduction, and best practices for keeping track of business expenses.
Now, let’s look at things from the opposite perspective: non deductible business expenses, which do not lower tax liability.
The IRS defines deductible business expenses as ordinary, necessary, and for business purposes.
So, to be nondeductible, it must be at least one of the following:
- Unordinary: not commonly accepted in your trade or business
- Unnecessary: not helpful or appropriate for your trade or business
- For Personal Use: business money cannot be spent on personal expenses
Don’t Even Try Deducting These 13 Non-Deductible Business Expenses
It’s easy enough to make a mistake and put a personal expense on a business account. However, you’ll notice a common theme throughout this list. Personal expenses are not deductible. Keep that in mind, and parsing what is and isn’t deductible will be a breeze.
1. Automobile Expenses Attributed to Personal Vehicle Use
Many people have vehicles that double for both work and personal use. Whether using the standard mileage deduction of $0.65 per mile or the real expense method, only work-related travel counts.
When deducting for gas, repairs, or lease payments, expenses attributable to personal use are non-deductible.
2. Personal Clothing (Excluding Uniforms or Specialized Gear)
This applies to everyday wear and anything you might wear outside of work. Unless the clothing item was purchased for work, and you plan to wear it mostly at work and not elsewhere, it’s non-deductible.
3. Club and Membership Dues (Even if Used for Legitimate Business Purposes)
While your golf club membership may be a great way to network, and your hotel club membership might come with some great travel rewards for sales roadshows, the cost of joining and maintaining these memberships is a non deductible business expense.
4. Volunteer Hours
Giving back is a great way to help your community and boost employee morale, but unfortunately, you cannot deduct the hourly time spent. That said, you can deduct charitable contributions of cash or physical goods—just not time spent volunteering.
5. Political Contributions (Including Lobbying and Campaign Expenses)
Money given to political groups or candidates running for public office is not deductible, even though they seem charitable in nature. The same goes for donations made to groups that lobby for public policy.
6. Federal Taxes
This may seem obvious, but you can’t deduct your federal tax payments as business expenses.
However, you can deduct state and local taxes to the extent they’re attributable to your business.
As part of the Home Office Deduction, for instance, a portion of real estate taxes can be deducted. For another example, property taxes on your business’s office space are deductible.
7. Fines and Penalties From a Governmental Agency
No, you cannot write off parking fees or tickets. Nor can you write off late fees paid on federal or state taxes owed with your tax return
8. Losses From Selling Personal Property
This is one area of business and personal life where the line is clear—you cannot deduct the value of any lost earnings from selling anything you own personally for less than it is worth in your possession. This includes the sale of your home, furniture, or car.
9. Groceries
Meals for your team at the office, business lunches with clients, or travel meals are certainly deductible. But even if you work from a home office, the IRS doesn’t allow you to deduct groceries. This applies to drinks, meals, or snacks you might buy while working from a coffee shop or restaurant as well.
10. Life or Disability Insurance
Premiums from a life insurance or disability policy in the name of the business or business owner, even if you’re self-employed, are not deductible.
If you cover premiums on behalf of employees, however, those expenses are deductible. The key is that the business cannot be a beneficiary.
Notably, health insurance premiums are deductible for self-employed business owners.
11. Residential Landline Telephones
This one is becoming less relevant, but monthly residential landline fees aren’t business expense deductible, even if you qualify for the home office deduction. However, long-distance phone charges or a second landline exclusively for business are deductible.
12. Travel Expenses for Accompanying Guests
If you take a business trip, travel or lodging expenses are fully deductible and a portion of meal costs, according to specific rules.
However, you cannot deduct the travel expenses for any personal companions you bring. This includes spouses, children, acquaintances, or friends.
13. Nondeductible Entertainment Expenses
You may wonder if you can write off entertaining clients as a business expense. Unfortunately, these are nondeductible entertainment expenses.
This goes for concert tickets, sporting events, or other forms of entertainment for clients.
However, it is considered deductible if this is for employee team building.
Frequently Asked Tax Deduction Questions
Filing taxes isn’t fun. You want to save every dollar that is rightfully yours, but on the other hand, there’s always the looming question of “What if I get audited?”
So, we compiled a list of the most frequently asked unusual tax deduction questions. We hope it will put your mind at ease to know, with certainty, whether or not these are tax deductible.
1. Are Computers Tax Deductible?
Self-employed individuals or business owners may deduct the proportion of computer use attributable to the business. That can be 100% in some cases and considerably less if you use your laptop for personal reasons.
Employees, however, cannot write off this expense.
2. Are CPA Fees Tax Deductible?
Yes.
Fees for CPAs, lawyers, and other related business consultants and advisors are deductible.
3. Can a Business Write Off Consulting Fees?
Yes. If you hire a consultant for your business in any capacity, it’s most likely tax deductible.
4. Can You Write Off Clothes for Work if You’re Self-Employed?
No, clothing for personal use is not considered a business expense.
However, business-specific work clothing is considered a “miscellaneous” expense and subject to the 2% rule. Gear such as protective gloves and boots, suits for business meetings, bright vests, and hard hats used by architects are deductible.
To take the deduction, tally all expenses in the “miscellaneous” category. The amount which is more than 2% of adjusted gross income is deductible.
5. Can You Write Off Suits for Work?
No. Articles of clothing that would be suitable for everyday use are not deductible. That includes professional business attire, such as suits.
6. Can You Deduct Gas on Taxes?
Yes.
If a vehicle is purely for work, 100% of gas is deductible.
If the vehicle doubles for personal use, only the proportion of use attributable to work is deductible.
The simplest calculation is the standard mileage deduction. For every mile driven for business, you may deduct $0.65. The real expense method is more complicated but is potentially worth a larger deduction. We cover that in full in our article on travel expense deductions.
7. Can I Deduct My Car or Truck Payment as a Business Expense?
Yes.
The proportion of use attributable to work corresponds to the proportion of your deductible payment.
8. Can You Write Off Vehicle Repairs?
Yes.
The deduction is proportional to the business use for the vehicle.
9. Can You Write Off Business Expenses Without an LLC?
Yes.
Sole proprietors who file an annual Form 1040 to file taxes may. However, W-2 employees may not write off business expenses.
10. Is Sales Tax Deductible for a Business?
Yes.
Sales taxes paid to local governments for the sale of goods are deductible as a business expense.
11. Can You Deduct Travel Expenses for Work?
Yes.
Subject to rules and limitations, some travel expenses are fully deductible, while others are partially deductible.
12. Are Health Club Dues Tax Deductible?
No.
Gym memberships, yoga classes, and other health club dues are not tax deductible.
13. Are Haircuts Tax Deductible?
Generally, no.
Even though it’s necessary to look your best in business, if you’d still get the same haircut regardless of your job, it isn’t tax deductible.
If the trip to the salon is for a specific work-related event, such as a photo shoot or performance, then the haircut can be considered deductible.
14. Can you Write off Gifts to Clients?
Yes.
Up to $25 per recipient per year is deductible.
15. Are Transaction Fees Tax Deductible?
Yes.
Transaction fees charged by financial institutions for moving and handling money are tax deductible.
16. Are Cell Phones Tax Deductible?
Yes.
If it’s purely a business cell phone, it’s 100% deductible.
Should you use yours for business and personal purposes, the proportion of phone costs attributable to the business is tax deductible. The calculation works the same as the real expense methods of calculating the home office or personal vehicle deductions.
Conclusion
When it comes to nondeductible expenses, knowing is only half the battle. Daily, you must use your best judgment and common sense to decide if an expense is deductible and, thus, which account to charge it to.
Professional accountants can help unravel past transactions and organize your record-keeping procedures to make future tax seasons a breeze.
Our team has a wealth of knowledge and is always looking for ways to help business owners’ lives easier. In addition to providing virtual bookkeeping services for small businesses, we put together The Entrepreneur’s Business Tax Pack to help DIYers maximize their deductions.
