Businesses often receive numerous receipts and invoices for costs incurred by their employees and sometimes by owners as well. But, how well do you know that not every receipt falls under tax deductible? If you mistakenly submit the cost incurred for personal reasons, remember it can trigger a tax audit, which could result in penalties.
Therefore, you need to familiarize yourself with non deductible expenses as they are not only important for filing tax returns but also play a crucial role in enhancing your expense management process.
Some expenses are unavoidable, but you only need to submit deductible expenses. So, knowing exactly what to submit or not will help you reduce your taxable income and save your money.
To clear up your confusion, we have a blog explaining what non deductible means and it also sheds light on deductible vs non deductible expenses. Ready? Let’s talk about non deductible expenses in detail.
What Does Non Deductible Mean?
Non deductible refers to the expenses that businesses cannot take off from their income while filing taxes. With non deductible expenses, you can’t lower your taxable income and will have to pay full taxes.
Some business expenses might be unavoidable in your routine life, but that doesn’t mean they have to qualify for taxes. Anything that goes straight out of your pocket will fall under non deductible expenses, regardless of whether the transaction occurred during business hours or not.
Suppose you take your teammate out for dinner, refill the gas in your car, or incur penalties for late payments, all such expenses will be considered as nondeductible expenses. Any cost incurred due to personal reasons and not for business benefit is simply non deductible.
One of the non deductible expenses examples is let’s say you visit Maimi for a business meeting and go out for dinner, the cost incurred for your meals isn’t deductible. However, your flight tickets are deductible because you were mostly busy holding business meetings with clients.
20+ Non-Deductible Business Expenses You Can’t Claim
Here is a breakdown of some of the most common non taxable deductions that are a part of business expenses.
1. Political Contributions
You may back a local political candidate with all your heart and soul. They may even be enthusiastic about your field and planning substantial future expenditures on it. However, donations to political campaigns are never tax deductible as a business expense. This is not always the case, but it occasionally applies to philanthropic giving.
2. Gifts
A present to a prospective customer or business partner is not out of the ordinary. You care about maintaining a solid working relationship, so you decided to demonstrate your gratitude. In any case, there is a maximum amount you should spend on a present for another person.
Business-related gifts made for commercial purposes are only tax deductible up to $25. If the total lobbying expenses exceeded the allowable limit, the amount would not be tax deductible. So, you would have to fork up your cash to purchase an expensive gift.
3. Travel Expenses
Depending on your line of work, frequent business trips away from the office may be routine. In addition, most business travel costs are completely deducted expenses. Certain expenses incurred when traveling, such as those for gas, lodging, and food, are often deductible.
You cannot claim reimbursement or pay their costs if you bring a companion such as a friend, spouse, or partner that comes under family expenses. All personal expenses incurred by anyone accompanying you on your business trip who is not an official company employee are your responsibility.
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4. Charitable Contributions
Charity donations are deducted expenses for individuals (using Schedule A) but often not for companies. What if your firm is a single proprietorship, and you include it on your tax return for the tax year?
Since Schedule C is for partnerships and corporations, single owners cannot deduct contributions. The Internal Revenue Service would consider this a nondeductible personal cost. Similar considerations apply to a single-member LLC (LLC). However, corporations may claim tax breaks on their behalf since the general rule or law recognizes them as legal persons.
5. Commuting Expenses
Do you often use general public transit or drive your personal vehicle to and from work? Unfortunately, certain expenses incurred while traveling to and from work each day are not tax deductible.
However, suppose you have to take a trip during business hours to meet with a potential client or attend a directly related work meeting. In that case, the commuting costs of your trip may be tax-deductible.
6. Meals
Meals and entertainment activities paid for on business activities and trips are often tax deductible. However, the expense of a team meal intended to foster camaraderie among workers may not be tax deductible. Therefore, distinguishing between business and leisurely dining costs while working late is essential.
For future new business reasons, supper with a prospective customer is often deductible as an expenditure. However, going to the movies with your co-workers is not tax deductible.
7. Personal Expenses
Some personal living expenses such as buying groceries, food, and clothes for your family or colleagues are considered to be non deductible expenses. If you use the company’s vehicle or mobile phone for personal reasons, then the cost incurred can’t be claimed for reducing taxable income. Whichever things you buy and are not connected with your business operations will fall under non deductible expenses.
8. Childcare expenses
Childcare expenses such as babysitting fees can’t be written off regardless of the child’s age and the type of business. Even if your business requires childcare equipment or tools to run your business, the expenses will be non deductible. Hence, you can’t make any claims to minimize your overall taxable income.
9. Anything Illegal
Any lobbying expenses linked to criminal actions or illegal bribes are not considered tax deductible. Let’s say if you incur losses from things like gambling, then they would not be deductible. If you need additional information, you can see a lawyer. Still, you can’t claim a deduction no matter how high or low the amount is.
10. Capital Expenses
Investments in things that will serve your company well for more than the current year are called capital expenses. Possible examples of such items include business vehicles, buildings, plots of land, and franchise rights.
Capital expenses are not deductible, although starting expenditures (usually up to $5,000) are. If you have questions regarding what qualifies as a capital outlay and whether or not your purchase price will be depreciable, you should see a tax professional.
11. Fines and Penalties
You can’t add fines and penalties imposed on your business under the deductible expense. The majority of fines and penalties are due to delays in filing federal and state tax returns. All penalties, including parking fees, violations, safety infractions, and other offenses, cannot be deducted from taxable income.
12. Club Memberships
If business owners apply for club membership to get multiple benefits and expand their business network, the cost will be non deductible. Club memberships or gym membership are considered for personal benefits and not for business purposes. Therefore, you can’t take off membership fees from your income subject to taxes.
13. Legal Fees
All legal fees incurred during the commercial buy property are not tax deductible. Therefore, neither the cost of the land nor its modification can be written off. However, depreciation of the structure can be considered as deductible but only if it meets with the tax guidelines. Legal fees for negotiating with vendors or contractors can also be deductible.
14. Vehicle Expenses
Although vehicle expenses are considered as deductible, not all those expenses can be claimed for tax deductions. You can make the claim if the vehicle is used only for business purposes. However, if the vehicle is used mostly for personal use, the cost incurred will fall under non deductible. Even if you commute daily from your home to the office using your personal vehicle, then expenses will be considered as non deductible.
15. Insurance
Insurance premium amounts paid on behalf of a company can be eligible for a tax write-off in certain jurisdictions and with certain policies like life insurance premiums. In most cases, premium amounts paid for mandatory insurance policies like workers’ compensation and general liability can be deducted from the gross income. But additional insurance policies, such as those for life or disability are non deductible expenses.
16. Home Office Expenses
In certain cases, you can write off the expenses related to setting up a home office that you need to dedicate only a certain area of your home or office to your small business. It need not be a designated area, but it should be free of distractions.
Because of this, it’s unlikely that you’ll be able to claim a deduction for a home office that also serves as a guest bedroom. However, it still comes under deductible business expenses if you set aside a specific basement area for tax returns and tax purposes.
17. Adoption Expenses
Adoption expenses like fees, court costs, attorney fees, and travel expenses, are often deductible for individuals. However, they can not be claimed for tax deductions in a bid to lower tax liability for your business. Similarly, even if you are running a business as a sole proprietor, then you can’t claim a tax deduction. IRS considers adoption expenses as non deductible.
18. Business Clothes
Business requirement of employees wearing professional attire during their work hours isn’t deductible expense by the IRS. No matter how well you dress up to impress business clients, remember the cost of a suit will fall under non deductible expenses. Those who are required to wear branded clothes can deduct expenses when they file personal taxes and not while filing business taxes.
19. Demolition Expenses or Losses
If it becomes necessary to demolish a structure due to unavoidable circumstances, keep in mind that the cost of demolition isn’t something that you can deduct from overall business income. You can save expenses for your personal records, but can’t claim for tax deductions. Similarly, land depreciation cost falls under non deductible expenses.
20. Lobbying Expenses
Lobbying expenses are also non deductible as per the tax guidelines provided by the IRS. The cost incurred for lobbying to protect or expand your business are not allowed as deductions. Therefore, you can’t minimize your business income subject to taxes with lobbying expenses. Hence, you can’t write off such expenses related to lobbying.
21. Donations
Donations made to several non-profit organizations are non deductible. Even though charitable contribution comes under tax deductible up to some extent, donations are considered as non deductible for those who are sole proprietors. The reason is the taxes are filed by submitting Schedule C form. So, the IRS considers donations as non deductible expenses.
Deductible Vs. Non Deductible Expense
To be tax deductible, company costs must be both “ordinary” and “necessary,” something every business owner should keep in mind. You need to learn to itemize deductions for your small business owners. However, if you don’t know what is the difference between deductible expenses and non deductible expenses, let’s find out:
| Deductible Expense | Non Deductible Expense |
|---|---|
| Deductible expenses can be taken off from your taxable income. | Non deductible expenses should not be deducted from taxable income. |
| Reporting deductible expenses can lower tax liability in total. | It has no impact on tax liability. If submitted to the IRS, it may result in penalties. |
| Deductible expenses are associated with your core business operations. | Non deductible expenses are usually personal expenses that have nothing to do with your business activities. |
| It requires expense receipts as proof during tax reporting. | No proof is required since they are not for tax purposes. |
| Cost of business travel, office supplies, or employee incentives are examples of deductible expenses. | Examples of non deductible expenses are personal expenses such as membership fees or penalties. |
The Importance of Valid Expense Receipts
Expense receipts hold significance for multiple reasons. Here is why you need to keep them handy.
1. Tax Compliance
Without receipts it is difficult to analyze your business cash flow, making it challenging to comply with tax laws and regulations. You can only claim a tax refund if you have a valid receipt of expenses that fall under tax deductible. Storing receipts may seem trivial but it is essential as far as your tax obligations are concerned.
2. Reimbursement Expenses
Expense receipts can help you process the reimbursement payment if it complies with your company’s reimbursement policy. Receipts need to be verified by the accounting team in order to accept or reject the reimbursement claim made by your employee. Following the acceptance of the reimbursement claim, you can initiate the reimbursement payment.
3. Accounting records
Keeping expense receipts in your account records can help you monitor the cash flow, and reduce unnecessary spending. With expense receipts, you can even update your reimbursement policy and make informed business decisions. An accurate accounting record also helps you to settle false claims or disputes.
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The automation software provides an accurate expense report to offer a bigger picture of your business’s financial health. That’s not all, Moon Invoice consists of 20+ business reports that can help you review product pricing and achieve business scalability quickly.
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Conclusion
Non deductible expenses are usually difficult to identify when you are running a small or mid-size business. But, it is important to know as long as you are obligated to file taxes. By reviewing the aforementioned list, now you know which are non deductible expenses and how they differentiate from deductible expenses.
Also, we discovered how utilizing expense tracking software like Moon Invoice can simplify your expense management. If you are looking to optimize your expense tracking process, look no further. Try Moon Invoice free for limited days and transform your expense tracking process today.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
