Key Takeaways

• A proper understanding of nondeductible business expenses is helpful for proper tax filing.
• All the legal or government penalties (like OSHA fines) are nondeductible.
• Donations to political campaigns and parties are not eligible for tax deductions. 
• Buying luxury items for the business is not deductible.

What Does Non Deductible Mean?

Non-deductible refers to the expenses that businesses can not deduct 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 nondeductible. Any cost incurred due to personal reasons and not for business benefit is simply nondeductible.

One example of non-deductible expenses is visiting Miami for a business meeting and going out for dinner. The cost of your meals isn’t deductible, but your flight tickets are deductible because you were mostly busy holding business meetings with clients.

20+ Non-Deductible Business Expenses You Can’t Claim

What does non-deductible mean? After unlocking the answer to this question, we now understand the type of non-deductible business expenses. Here is a breakdown of some of the most common non-taxable deductions that are 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

Presenting 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 deductible 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, who falls 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.

4. Charitable Contributions

Charity donations are deducted as 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 self-employed business 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 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 and Entertainment Expenses

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, a supper with a prospective customer is often deductible as an expenditure. 

Regarding entertainment expenses, businesses can no longer deduct expenses for client-related entertainment after the imposition of the 2017 Tax Cuts and Jobs Act. It means that expenditure on movie tickets, clubs, amusement parks, and other sporting events is not deductible when you take your client there for entertainment purposes.

7. Personal Expenses

Some personal living expenses, including buying groceries, food, and clothes for your family or colleagues, are considered non-deductible expenses. If you use the company’s vehicle or mobile phone for personal reasons, then the cost incurred can’t be claimed to reduce taxable income. Whatever things you buy that 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 or 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 business expenses. 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

Capital expenses are investments in things that will serve your company well for more than the current year. Possible non-deductible expenses include business vehicles, buildings, plots of land, and franchise rights.

Capital expenses are not deductible, although start-up 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 to 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. Any club memberships, including hotel and country clubs or gym memberships, 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 purchase of 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 deductible, but only if it meets the tax guidelines. Legal fees for negotiating with vendors or contractors can also be a deductible business expense. 

14. Vehicle Expenses

Although vehicle expenses are considered deductible, not all those expenses can be claimed for tax deductions. You can 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 vehicle, the expenses will be considered non-deductible. 

15. Insurance

Insurance premiums 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 gross income. 

Unemployment and health insurance premiums may be deductible. However, 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 if 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 your business’s tax liability. Similarly, even if you are running a business as a sole proprietor, you can’t claim a tax deduction. IRS considers adoption expenses as non-deductible. 

18. Business Clothes

The business requirement for employees to wear professional attire during their work hours isn’t a deductible expense by the IRS. No matter how well you dress up to impress business clients, remember that 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, but 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 your overall business income. You can save expenses for your records, but you can’t claim 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 is not allowed as a deduction. Therefore, you can’t minimize your business income, which is subject to taxes and 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 contributions are tax-deductible up to some extent, donations are considered non-deductible for those who are sole proprietors. The reason is that taxes are filed by submitting the Schedule C form. So, the IRS considers donations as non-deductible expenses.

22. Taxes

Generally, taxes are deductible, but five states of the USA – Iowa, Alabama, Missouri, Oregon, and Montana allow a small deduction of federal taxes from the state tax. However, except in these states, if your business is running in any other state, then you should never try to deduct federal income taxes.

IRS allows 4 types of deductible non-business taxes for local and state:

1. Foreign income taxes
2. General sales taxes
3. Real estate taxes
4. Personal property taxes

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 the difference is between deductible expenses and non-deductible expenses, let’s find out: 

The Importance of Valid Expense Receipts

It doesn’t matter what expenses you make; you must look for expense receipts, which are significant 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 tax-deductible expenses. 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 they comply 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. 

Track Your Small Business Expenses with Moon Invoice

While manually tracking business expenses does not guarantee accuracy, using Moon Invoice for expense tracking can make a real difference. Moon Invoice makes your expense tracking job so easy that all you need is a few minutes. It can generate expense reports within a minute, helping you gain insights into business profits and losses.

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.

Below are a few reasons why you need Moon Invoice for expense tracking:

✅Business Sales Analysis
✅Streamlined Expense management
✅Timely Tax Reporting
✅Downloadable Reports
✅Easily Accessible Receipts
✅Project Management
✅Cloud Storage

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 that as long as you are obligated to file taxes. By reviewing the list above, you now know which expenses are non-deductible and how they differ from deductible expenses.

We also discovered how expense tracking software like Moon Invoice can simplify expense management. If you are looking to optimize your expense tracking process, look no further. Try Moon Invoice free for a limited time and transform your expense tracking process today.

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