Most business owners view their check registers as a means to measure their business income. However, your bank balance is almost never a reflection of your income. Although there are certain costs you may incur for your company that make good business sense, the tax law doesn’t view them all as write-offs.
To be tax deductible, a business expense must be ordinary and necessary and not specifically excluded by the IRS. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.
To complicate things further, beginning in 2018, the list of nondeductible business expenses grows longer because of changes in the Tax Cuts and Jobs Act. While you may have been able to deduct these items in 2017, you can’t do so going forward.
It's important for business owners
to know that not all of their
business expenses are deductible.
After spending the last several days defending a client who wasn't well-served by his prior accountant, and 'making friends' with the Chief Counsel of the IRS, it's important for business owners to understand which of their business expenses are not tax deductible.
Volunteer Hours - Giving back is a great way to save on business taxes while helping your community and boosting employee morale. But when it comes to making your charitable contribution count toward tax deductions, you cannot deduct the hourly time you or your employees spend volunteering.
Employee Bonuses - Cash bonuses paid to employees for any reason, and any amount, not reported on the employees W2 are not deductible.
Clothing - While many people in business want to dress for success, the government doesn’t help to underwrite the cost by permitting a deduction. Only clothing not suitable to street use (e.g., uniforms, hardhats, etc.) can be deducted. 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. This applies to everyday wear or anything you can wear outside of work. However, you can deduct uniforms or specialized gear such as lab coats or gloves that protect researchers or bright vests and hard hats used by architects when they’re on site. Essentially, the clothing must be specifically required by your employer to be deductible.
Gifts (to business associates, customers, vendors, etc.) - 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" even if it makes good business sense to give a more expensive gift in certain situations.
Hobby Losses - These are expenses which create a loss in an activity which is mostly a hobby and which is not deemed to be a business. The IRS has guidelines on whether your activity can be considered a business and thus has deductible expenses. Check with your tax preparer for more information on your specific circumstance.
Life Insurance Premiums - If you pay the premiums for employees and your business is not the beneficiary of the plan, you can deduct them. But if your business is a beneficiary or receives some sort of indirect benefit if the employee dies, you can’t deduct the premium payments. However, the deductibility of premiums paid for officers and and key employees is situational and is dependent upon the entity type as well as the plan beneficiary.
With the exception of key persons, any interest paid or accrued on any indebtedness with respect to 1 or more life insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individuals.
Political Contributions - You can't deduct contributions your business made to a political party or to a candidate. That includes lobbying costs and costs for campaign events, including appearances before legislative bodies and expenses to influence voters. You may contribute to any qualified charity, and there are ways to deduct charitable contributions, but not political ones. Money given to political groups or candidates running for public office are not deductible, even though they seem charitable in nature. The same goes for donations made to groups who lobby for law changes.
Taxes - Generally, your taxes aren't deductible from your federal business tax return except in the case of payroll taxes, real estate taxes for business-occupied property and personal or manufacturing property tax.
Fines and Penalties - Government-imposed fines and penalties are nondeductible, regardless of the reason or amount. Interest paid by sole proprietors and owners of pass-through entities on tax underpayments is also non-deductible.
Illegal Activities - 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... you get the idea. These illegal activities also include bribes and kickbacks.
Additional non-deductible business expenses beginning in 2018
Part of your interest expenses on borrowing (if your average annual gross receipts for the three prior years exceeds $25 million)
ALL business and/or client entertainment costs
Reimbursements of employees’ commuting costs
Reimbursements of employees’ moving expenses
Net operating loss carrybacks (only carryforwards are allowed, and they can only be used to offset 80% of taxable income)
Later this week, we will continue this to discuss this issue in Part 2 (Personal/Business Expenses) and Part 3 (Capitalized Business Expenses)The above is only a PARTIAL list of non-deductible business expenses.
As always, this information is not all-inclusive and is not intended to replace or serve as a substitute for accounting, tax or other professional advice, consultation or service. No conclusion on these topics should be drawn without further discussion with a professional adviser. Any business, accounting or tax services, any advice regarding those services, contained within our website should not be construed as tax advice and is not intended as a thorough, in-depth analysis of specific issues, a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. It is our policy to put all advice upon which a client might rely, into a written memorandum prior to you relying on such advice.
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While we are, of course, available to provide you with any business, accounting or tax services, the information contained herein is general in nature; any advice regarding those services should not be construed as tax advice and is not intended as a thorough, in-depth analysis of specific issues, a substitute for a legal, accounting or tax advice or opinion, nor is it sufficient to avoid tax-related penalties to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact Strive Tax & Accounting, LLC or other tax professional prior to taking any action based upon this information. Strive Tax & Accounting, LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.