Business Tax Deductions the IRS Will Not Allow
Business Expenses Not Allowed as Tax Deductions
As you complete your business taxes, you may be gathering information and wondering what is deductible and what is not. This is a list of expenses as part of the 2017 Tax Cuts and Jobs Act—effective for the April 2018 filing—that is NOT deductible on your business tax return—or your personal return, for that matter.
First, to state the obvious, you can't deduct an expense if you didn't spend the money. Also, 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.
Fines and Penalties
You can't deduct the fine you paid for not estimating your taxes last year or underpayment of estimated tax penalties. You also cannot deduct any other fines and penalties related to your federal tax return. The most common fines are for failure to file by the due date and late payment.
You can't deduct contributions your business made to a political party or to a candidate. That includes lobbying costs and the costs of attending campaign events. You may contribute to any qualified charity, and there are ways to deduct charitable contributions, but not political ones.
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, or other illegal activities. These illegal activities also include bribes and kickbacks.
Capital expenses are for the purchase of long-term capital assets, like vehicles and equipment. These costs can be depreciated—extended over the serviceable life of the asset—but they can't be deducted in a single year as a lump sum.
There are some exceptions, for start-up business costs, for example, but for the most part capital expenses are not deductible in full in a single 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. You may deduct state and local sales taxes from on your personal tax return, but not for your business return.
Hobby losses are expenses that create a loss in an activity which is mostly a hobby and which is not deemed to be a business activity. The IRS has guidelines on whether your activity can be considered a business and thus has deductible expenses.
If hobby losses are not deductible on your business tax return, there may be some losses deductible on your personal tax return. Check with your tax preparer for more information on your specific circumstance.
If you belong to a country club, social club, fitness facility, or other clubs, your dues are not deductible as a 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, can be deductible business expenses. Meals and entertainment expenses are a separate deduction category and are considered separately.
Everyone travels from home to work, and the IRS says these costs are not deductible business expenses. However, if you travel for business from home to meet customers, that is deductible. Or if you travel between business locations, that's also deductible. If your travel is to 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)
The cost 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. Space must be used regularly and exclusively for business purposes. For example, even if you use a bathroom for your daycare children, you can't deduct the space unless it is never used by your family.
The new tax law has cut out the deduction for entertainment expenses. This means no more sporting events, concerts, or resorts. Business meals, including meals while traveling and some meals for employees, are still deductible, but there are some changes.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.