Non-Deductible Business Expenses: What You Can't Write Off

Self-employed business owners and small businesses can deduct some business expenses from their federal income taxes. These deductible business expenses are listed on Form 1040 Schedule C and reduce the amount of taxable business income.

Deductible business expenses are those expenses paid out of pocket by the owner. If the office is short of office supplies and you buy pens and printer paper for office use, you can write off that cost as a business expense when you file your taxes.

But, not all expenses are deductible.

Taxpayers can deduct legitimate expenses but can’t get creative about the details. For instance, a trip to Disney World is not a “business trip” if you just meet a client in front of Cinderella’s castle. To justify a tax deduction for the trip you must show all expenses were business related.

Small business owners and sole proprietors should understand business tax deductions so they don’t run afoul of the IRS. Not everything you spend on your personal business is a legitimate business expense.

This article reviews a few common things that are not deductible business expenses.

Deductible Business Expenses

Under the Tax Cuts and Jobs Act (TCJA), only self-employed business owners can claim business deductions on their income tax returns. Employees cannot claim out-of-pocket expenses on their taxes.

You can claim any expense incurred during a business activity on your Schedule C. Most small businesses take the standard deduction since their deductions are not large enough for an itemized deduction list.

Typical deductions include:

• Travel costs
• Home office expenses
• Equipment depreciation
• Vehicle use and mileage
• Startup costs

You must have receipts and other proof that these costs were for business use and not personal use. If your expenses are high enough to justify itemized deductions, you may want to consult an accountant or CPA.

Non-Deductible Business Expenses

It’s easy to get creative with “business deductions,” especially if you have a home office or a side gig. Separating your business-related travel time from personal travel time seems trivial.

However, the IRS looks for such expenses during audits. You can only deduct “ordinary and necessary expenses” for business tax purposes.

Talk to your accountant or a tax attorney if you have questions about non-deductible business expenses. Chances are that what you thought were “business expenses” probably aren’t.

For example:

• Capital expenses: Although your startup costs are deductible, large capital expenditures—expenses that will benefit your business for more than a year—are not. Some equipment may give you other tax breaks, so talk to your accountant.
• Political contributions and lobbying expenses: As a sole proprietor, you can contribute to whatever political candidate or cause you wish. However, you cannot deduct that from your tax bill. Attending a political event or lobbying conference is also not tax-deductible, even if you believe the cause supports your business efforts.
• Entertainment expenses: Taking a client out to a show used to be part of the general entertainment deduction. However, the TCJA eliminated that deduction. Other types of entertainment, such as having a premium cable subscription in your office, are not business expenses unless your business requires you to have such a subscription. For instance, a sports bar that depends on showing sporting events might need a cable sports package.
• Gifts: Business owners can deduct up to $25 in gifts. After that, the cost is non-deductible. If you plan to impress a client, you’ll need to pay for it yourself.
• Travel and commuting expenses: “Travel expenses” mean long-distance travel away from your home. You can deduct business travel for yourself but not for anyone else. If the purpose of the travel is for any reason other than business, it is not deductible. “Commuting” to and from home to work is not deductible, although if you use your own car for business purposes during the work day, that travel may be a deductible expense.
• Fines, penalties, and legal fees: Legal fees unrelated to the course of business are not deductible. This can be a murky area even for attorneys. For instance, consulting an attorney about a real estate purchase for a new office is not deductible, but consulting an attorney to negotiate a contract with a vendor is. You cannot deduct fines and penalties incurred by your business.
• Personal expenses. If you run a home office or hire family members, you must separate business and family or personal expenses. This includes child care, family travel, and health club memberships.
• Charitable contributions: You can deduct charitable contributions on your personal tax returns, but not your business returns.
• Insurance: You can deduct life insurance premiums if your business pays the premiums for all employees. Sole proprietors should ask a tax attorney about their insurance.
• Illegal activities: It shouldn’t need to be said, but illegal activities are non-deductible. People try to deduct “certain items” and get caught. If you’re not sure whether something is illegal, it probably is. If you have questions, consult a tax attorney.

Semi-Deductible Expenses

Some expenses are deductible as long as the activity is strictly business-related. You must determine if keeping your business and personal expenses separate is cost-effective for tax purposes.

Business Meals

Business meal expenses are 50% deductible. You and your client “split” the deduction, so if the meal costs $100, you can claim $50 on your taxes. Workplace snacks and coffee are 50% deductible as well.

Company parties or events are 100% deductible if there is a clear business purpose, like an “employee recognition party.” Keep records showing the purpose of the event in case of an audit.

Home Offices

Home offices are poorly understood by most work-from-home business people. Expenses are only deductible if you use the area claimed regularly and exclusively for business purposes. That means you cannot use it for any other reason. For instance, if you use the same space to watch TV or play video games after work, it is not a “home office” for tax purposes.

If your home office is exclusively used for work, you can deduct the cost of utilities, property tax, or rent for the percentage of space the office space uses in the house.

The same is true for any other shared items or equipment. If you buy office supplies, you can only deduct the amount used for the home office and not those used for the household. You should have separate bank accounts to avoid mingling interest and deposits in the accounts.

Get Legal Advice from a Tax Attorney

Small business owners can find tax laws complex, especially when it comes to deductions. Understanding deductible and non-deductible business expenses is the job of tax professionals like tax attorneys. If you have questions, contact one near you. Don’t take on the IRS yourself.