Hey everyone! I’m Cindy, the Tax Manager here at Bette Hochberger, CPA, CGMA. Navigating the complexities of tax-deductible expenses can be a minefield for anyone in the business world. While the IRS permits a variety of deductions to ease your tax burden, it also sets clear boundaries around what cannot be reduced from your business income. These non-deductible business expenses are often overlooked and misunderstood, but understanding them is key to ensuring you’re not caught off guard when tax season arrives. Let’s jump in and learn more.

What You Can’t Deduct: The IRS’s Non-Negotiables

Let’s break down some of the most common expenses that the IRS typically won’t allow businesses to deduct:

  1. Entertainment Expenses: Gone are the days when business owners could deduct the cost of wining and dining clients. The recent changes in tax law have almost entirely eliminated deductions for entertainment expenses
  2. Commuting Costs: The daily trek from home to the office is a personal expense, not a business one, so you can’t deduct it.
  3. Political Contribution: Keeping politics out of business—at least where taxes are concerned—is a must. Money given to political campaigns or parties stays off your business expense list.
  4. Fines and Penalties: If your business is fined for any reason, such as a late payment or a regulatory infraction, this cost is your responsibility and is not deductible.
  5. Excessive Executive Compensation: The IRS puts a cap on how much a business can deduct for high-earner salaries. Usually, compensation over $1 million for certain top executives is non-deductible.
  6. Certain Perks: Club memberships and other fringe benefits might be great for networking and morale, but they’re often not deductible.

Navigating Non-Deductible Expenses: Tips for All

Understanding which expenses are non-deductible is just the first step. Here’s how you can smartly navigate your way through these regulations:

  1. Keep Up With the IRS: The tax landscape is always changing. What was deductible last year might not be this year. Stay current with IRS publications and guidelines.
  2. Record Everything: Whether an expense is deductible or not, you should keep meticulous records. This is crucial for clarity and compliance if the IRS comes knocking.
  3. Get Creative (Legally): Some non-deductible expenses can be restructured into deductible ones. This requires careful planning and should be done under the guidance of a tax professional to ensure legality.
  4. Ask for Advice: When in doubt, don’t guess. Consult with a CPA or a tax attorney who can offer specialized knowledge, particularly for those gray-area expenses.

The Impact of Non-Deductible Expenses

For the inexperienced, discovering an expense is non-deductible can be frustrating, especially if it’s a cost that feels integral to your business operations. But it’s not all doom and gloom. 

While you may not reduce your taxable income with these expenses, understanding the rules helps you plan your business budget more effectively and avoid the surprise of an unexpected tax liability.

Knowing the ropes when it comes to non-deductible business expenses is crucial for anyone running a business. By staying informed, keeping organized records, and seeking expert advice when needed, you can navigate the tax year confidently and competently. 

Always remember that tax laws are complex and subject to change, so regular check-ins with the IRS guidelines or your tax advisor are a must to keep your business on track and compliant.

I’ll see you all again next time!