A Guide to Non-Deductible Business Expenses in the US

Company expenses cover anything from storefront rent to payroll costs for small businesses. Your costs play a part in whether you can have a net profit. Company expenses are both fixed and variable. 

A deductible cost is one that you can exclude from your total taxable profits. Deductible expenses minimize the responsibility for taxes. On the other hand, a non-deductible cost doesn’t affect your tax bill. 

Another cost type, though, is only deductible under unique conditions. Read on to learn everything you need to know about the U.S. government’s tax system regarding business expenses

A Guide to Non-Deductible Business Expenses in the US

An Overview of Expenses and Taxes

To minimize their tax burden, companies that operate to make a profit should disclose their expenses. According to the Internal Revenue Service, it needs to be both ordinary and appropriate to deduct qualifying business expenses. 

You may be able to subtract the entire sum, depending on the kind of cost. Individual costs are deductible only partly. And, it is not deductible on any expenditures. A business cost must be both ordinary and essential to be deductible. 

In your trade or company, a typical cost is one that is normal and acknowledged. One that is beneficial and ideal for your business or company is a required cost. To be deemed appropriate, an expenditure doesn’t have to be indispensable.

Non-Deductible Expenses

Some charges for business are not deductible. Expenses that are non-deductible include the following.

  • Expenses from lobbying
  • Political Contributions
  • Government penalties and fines (e.g., tax penalties)
  • Illegal (e.g., bribes or kickbacks) behaviors
  • Costs or losses for demolition
  • Educational expenses are incurred to help you meet the minimum requirements
  • Business Requirements
  • Legal fees paid to (usually) procure company properties

However, bear in mind that in every state and region, this list of non-deductible expenditures is slightly different. Some places allow you to deduct business costs that others consider to be fully non-deductible, while others will enable you to remove the same cost in part. 

That’s why if you’re not sure what counts as a non-deductible cost or as a deductible one, it’s essential to check in with your accountant or study local regulations.

The Tax 

Believe it or not, you might be able to subtract small parts of your federal taxes from your state taxes in certain jurisdictions. But, don’t even attempt to deduct taxes from your taxes as a general rule. 

Fines and Penalties 

Late charges on federal and state tax returns are the most common fines and penalties. These are non-tax-deductible costs, along with parking fees, security breach penalties, and all other penalties. 

Insurance 

Depending on state laws and insurance policies, some insurance can be tax-deductible, such as worker compensation and general liability insurance. Others are certainly not, whether they’re for you or for your staff, like an extra life or disability benefits.

Capital Expenses

Some start-up costs can be tax-deductible, but extensive facilities that last for years are commonly known as non-tax-deductible expenses. Speak to a specialist in deductible and non-deductible expenditures on whether you should subtract costs when the item depreciates. 

Commuting Costs 

Imagine that you were not the company owner, but an employee: if you were already paying these expenses, chances are high that they are non-allowable deductions. It is not deductible to drive to and from home, but commuting to customer sites during the workday. 

Office

You may be able to subtract space for home offices, but only under stringent conditions. In most cases, that means that the room you use for your work must be used solely for that purpose. You’re actually not allowed to subtract it if your office doubles as your guest room.

Meals and Entertainment 

You certainly can’t subtract the whole expense if you take your workers to lunch or have a weekly team-building activity. You will generally deduct 50% of it, though some exceptions might be entirely deductible, such as snacks in the break room. 

Legal Fees 

A Guide to Non-Deductible Business Expenses in the US
Image Source: BPlans Blog

All the legal costs are non-allowable deductions if you purchase property for your company. You can’t subtract the property’s value either, but over time, you will be able to deduct the depreciation of the house.

Conclusion

While claiming deductions, understanding which expenses you may deduct is essential. Again, certain charges for business are never deductible.  Check with your tax accountant if you are ever in question about deductible and non-deductible business expenditures.