What Are Non-Deductible Expenses in Business?
Some businesses have different types of policies in place, but a deductible expense can get subtracted from your gross income. They can help to reduce any tax liability. However, a non-deductible expense doesn’t impact your taxes at all.
There are certain expenses that are almost always deductible or reimbursable. Things like using your personal vehicle for work-related purposes and filling up with fuel. Or going on a business trip and getting reimbursed for your hotel accommodation.
That said, some expenses can never get deducted for federal tax purposes.
Here’s What We’ll Cover:
What Is a Non-Deductible Expense in Business?
Expenses can usually get broken into three different categories. Tax-deductible, non-deductible and context-specific deductions. It all depends on the unique situation, but it can be important to recognize which expenses fall under each category.
When it comes to non-deductible expenses in business, anything that has to do with personal spending would not be deductible. So, if you go out for lunch with a few friends and fill your personal vehicle with gas on the way, those expenses are non-deductible. Other personal spending can include things like rent clothing and entertainment.
Here is more of a breakdown of some of the most common non-deductible business expenses.
As mentioned above, ordinary expenses related to personal or family expenses aren't deductible. Things like personal motor vehicle expenses outside of business hours or your personal cell phone.
Basically, if it doesn’t have anything to do with business activities or you don’t need it to perform your work-related responsibilities.
You can feel passionate and support a local political candidate. They might even support your industry and have big plans to invest in your type of business. But, any political contributions are non-deductible expenses. This can also sometimes apply to charitable contributions, as well.
Do you drive your personal car to and from work every day or take public transportation? Commuting to and from work each day isn’t a deductible expense. That said, if you have to travel to see a client or for a work-related meeting during business hours, that could be a deductible expense.
It can be common to give a gift to a potential client or a business partner. You want to show your appreciation to have a strong business relationship in the future. But, there is a limit to how much you can spend on a gift you are giving someone.
You can only deduct up to $25 for business-related gifts. Anything more expensive would be a non-deductible expense. Meaning you would have to pay for an expensive gift using your own money.
Travel Expenses for Extra Travelers
Traveling for business can be common depending on the industry that you are in. And when you do travel for business, the majority of your expenses are deductible. Travel costs, like fuel, hotel accommodation or meals are usually deductible.
However, if you bring a friend, spouse or partner with you then their expenses are not covered or deductible. If anyone is traveling with you that doesn’t work for the company, any incidental expenses they incur will have to get paid out-of-pocket.
You also can't deduct any expenses that could get considered to be illegal activities. Things like gambling losses wouldn't get considered for expense deduction. You can seek legal advice if you need any more information, but if you don't include it on your tax return, you can't deduct it.
Meals and Entertainment
If you're traveling for work your meal and entertainment expenses are usually deductible. But, if you wanted to take your team or employees out for lunch for team bonding, that cost might not be deductible. It’s important to distinguish between personal and business expenses when it comes to meals and entertainment.
For example, if you are going to entertain a potential client at dinner for future business purposes, you can usually deduct that expense. But if you go to a movie with a coworker, that would be a non-deductible expense.
It can be difficult to understand the differences between deductible and non-deductible expenses. Depending on your business, you might have a varying list of itemized deductions employees can claim for a tax deduction. The most important thing you can do if you aren’t sure is to recognize the difference between a personal expense and a business expense.
Anything to do with personal activities or personal spending is a non-deductible expense. As are any political contributions, commuting costs and any gifts over $25. It might seem like an expense is business-related, but sometimes they’re not.
If you still aren’t sure which expenses are non-deductible, take a look at your company’s policy for deductible and non-deductible expenses. It will outline all the different expenses an employee can get reimbursed for and explain how to submit a claim.
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