Alright, it’s tax season for 2023 and there are a bunch of expenses you can’t deduct that might hit your wallet. Whether you’re doing your taxes solo or for a household, knowing what you can’t deduct can help you plan better for the next year. So, let’s talk about some of these non-deductible expenses you should remember when doing your 2023 tax return.
First off, what are non-deductible business expenses? Well, these are costs that a business has to pay but can’t deduct from its taxable income. This includes both day-to-day and big-ticket costs, but not any expenses that you can write off as deductions on your tax return. By getting a handle on itemized deductions and what non-deductible business expenses are, and by trying to limit them, you can cut down on the amount of taxes your business has to pay.
So, how does a non-deductible business expense affect taxable income? These expenses don’t directly impact taxable income. But, they do lower the total profit that you have to report on your taxes. For instance, if you spend $500 on a non-deductible expense, the business’s taxable income will be reduced by $500 even though it can’t be deducted from your taxes. So, knowing what counts as non-deductible expenses can help you make smarter financial decisions and manage your tax liability more effectively.
Now, when you’re running a business, there are many expenses that you can’t deduct from taxes. You should keep these non-deductible expenses in mind when doing your tax return for the 2022 tax year. Here are ten common non-deductible business expenses to remember:
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Work clothes: The government doesn’t help cover clothing costs via a deduction. So, if you have to wear a certain type of clothing at work, that cost is not deductible. But, you can deduct expenses for clothes not meant for public use like uniforms.
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Commuting costs: No matter how long it takes to get to and from your business, or what kind of transportation you use, commuting expenses are not eligible for tax deductions. This includes gas, vehicle maintenance and repairs, parking fees, and other related costs.
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Business-related gifts: You can only claim up to $25 for gifts given directly or indirectly to each person, even if it might be beneficial to give a more expensive gift in some situations.
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Entertainment expenses: The IRS doesn’t allow deductions for entertainment expenses, like tickets to see a show or golf outings.
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Capital expenses: A capital expense is a big investment made to set up and keep a business going in the long run. These expenses might include buying a vehicle, getting office furniture, or getting rights to a franchise. However, the IRS lets you deduct up to $5,000 per year for certain expenses when starting a business, like the cost of registering an LLC or buying a domain name for a website.
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Meals: Usually, the IRS only allows for a 50% deduction on meals.
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Political contributions: Contributions made to political organizations or candidates, as well as lobbying expenses, can’t be deducted from taxes.
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Life insurance premiums: Companies can deduct the cost of group life insurance for their employees as a business expense. But, you can’t deduct the costs of life insurance coverage on yourself, an employee, or anyone with a financial stake in the business if you’re the beneficiary of the policy.
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Fines and penalties: Generally, government-imposed fines and penalties are not considered deductible expenses, no matter the amount.
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Membership fees: Fees to a country club, social club, or fitness center are not tax-deductible.
There are also a few other non-deductible expenses to keep in mind:
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Tax underpayment interest for non-corporate taxpayers: Interest payments on tax underpayments made by sole proprietors and owners of pass-through entities are not eligible for deductions. These payments are considered personal interest, regardless of whether they are related to business income or not.
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Property purchase legal fees: A portion of these fees such as those dedicated to the cost of the building can be recovered over time through depreciation. Legal fees incurred when purchasing property should be included in the cost basis of the property.
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Certain employee expense payments: Companies are not able to deduct employee commuting costs such as parking and monthly transit passes, nor are they able to deduct expenses related to an employee’s move.
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Noncorporate taxpayers with excess business losses: Excess business losses must be treated as a net operating loss carryover for taxation purposes.
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Hobby Loss Rule: Any losses incurred from business activities that are deemed hobbies by the IRS fall under the category of hobby loss. The IRS views a hobby as any activity pursued for enjoyment rather than for financial gain. Income generated from all sources, including hobbies, must be reported to the IRS, and you cannot claim any deductions associated with the activity.
Now, you might be wondering what happens if you claim non-deductible personal and business expenses. Well, if you deduct these expenses from your business’s taxable income, it will increase the amount of taxes you owe. If the IRS finds out that you have incorrectly claimed a non-deductible expense, you might face an audit and potentially have to pay fines or back taxes.
One example of non-deductible taxes is political contributions. If you’re trying to influence legislation or support a particular candidate, any money spent on those activities can’t be deducted from your taxes.
You should also avoid mixing business and personal expenses (like family expenses), especially when you’re starting a new business. Not only does it make your accounting more complicated, but it can also lead to potential legal issues with the IRS if you’re not careful.
As for work-related travel expenses, you can deduct travel costs related to your job, provided you incurred the expenses while working away from home for one year or less on an assignment.
Since the start of 2018, businesses have been unable to deduct expenses associated with recreational activities like sports games and shows. However, companies may be able to claim a tax deduction for meals and beverages consumed at entertainment events.
Finally, businesses can deduct 50% of the cost of 2023 business-related meals and drinks from restaurants.
