Small business deductions are normal, necessary business expenses that the government won’t charge taxes on. Many of these are expenses that you do have to pay taxes on they are for personal use.
Despite the large number of small business tax deductions out there, there are also a lot of costs that you may associate with your business, but the government has decided are non-tax deductible, whether because they’re not directly business-related or they’re not strictly necessary.
Keep in mind, however, that this list of nondeductible expenses is slightly different in every state and city. Some places will allow you to deduct expenses that others consider completely nondeductible business expenses, while others will allow you to partially deduct the same expense. That’s why it’s important to check in with your accountant or research local regulations if you’re not sure what counts as a nondeductible expense, or as a deductible one.
Here is a list of nondeductible expenses to think about as you prepare your tax returns:
Believe it or not, in some states, you may be able to deduct small portions of your federal taxes from your state taxes. But as a general rule, don’t even try to deduct taxes from your taxes.
Fines & Penalties
The most common fines and penalties 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.
Some insurance, such as workers compensation and general liability insurance may be tax deductible, depending on local regulations and your insurance policy. Others, like extra life or disability insurance, probably aren’t, whether they’re for you or for your employees.
Capital Expenses & Equipment
Some start-up costs may be tax deductible, but large equipment that will last for years is usually considered an expense not deductible for tax purposes, at least not all at once. Talk to an expert in deductible and nondeductible expenses about whether you can deduct costs as the item depreciates.
Imagine if you were an employee rather than the business owner: If you’d still be paying these expenses, chances are good they’re non-allowable deductions. Traveling to and from home isn’t deductible but traveling to client sites throughout the workday is.
You may be able to deduct home office space but only under very specific circumstances. In most cases, that means that the space you use for your work must be used exclusively for that. If your office doubles as your guest room, you probably can’t deduct it.
This is pretty much the definition of things you can’t deduct. If it’s something whose primary use is not for your business, such as a car or phone line, then it’s a personal expense and can’t be deducted.
If you’re lobbying to get a law changed that would help your business or supporting a candidate whose platform would help your industry, it may feel like you’re investing in your business. But it’s still not tax deductible.
This means that you can’t deduct bribes, kickbacks, salaries paid to people who can’t work legally, or any material that you may have paid to have smuggled into the country. Of course, we strongly recommend that you don’t do any of those things in the first place. Breaking the law is a bad idea for reasons far beyond tax deductions.
Gifts over $25
Sometimes you may give more expensive gifts to say thank you for referrals or to recognize a good business partnership, but you’ll only be able to deduct up to $25. Anything else you spend is in the category of nondeductible expenses.
If you didn’t have business meetings, you might never need to wear a suit, but you still can’t deduct it as a business expense. However, if you wear a branded uniform or special safety clothing, you probably can.
Meals & Entertainment
If you treat your employees to lunch or have a weekly team bonding activity you probably can’t deduct the entire cost. You can usually deduct 50% of it and there are certain exceptions, such as snacks in the break room, that may be completely deductible.
If you buy property for your business, all the legal fees are non-allowable deductions. You won’t be able to deduct the cost of the land either, but you may be able to deduct on the depreciation of the building over time.
If you travel a lot for business, you may want to join hotel membership clubs, and it may be worthwhile to join country clubs or other social clubs where local business networking is done. However, these are not deductible expenses.
Travel Expenses for Additional Travelers
When you’re traveling for business, many of your expenses are deductible. However, you will not be able to deduct expenses for traveling companions who aren’t part of the business. So if your spouse is your business partner, then both your airline tickets are deductible, but if not, then only one is deductible.