The 2023 tax filing season is here, and with it comes a slew of nondeductible expenses that could affect your bank account. Whether you’re filing taxes independently or as part of a household, knowing what isn’t deductible can help you more accurately plan for the upcoming year.
In this article, we’ll discuss several nondeductible expenses to keep in mind when preparing your 2023 tax return.
What are nondeductible business expenses?
Nondeductible business expenses are expenses incurred by a business that cannot be deducted from a company’s taxable income. This includes both operational and capital costs but excludes any expenses that can be written off as deductions on your tax return.
By understanding itemized deductions, what nondeductible business expenses are, and taking steps to limit them, you can reduce the amount of taxes your organization pays.
How does a nondeductible business expense affect taxable income?
Nondeductible expenses do not directly impact taxable income. However, it does reduce the total profit that is reportable on your taxes. For example, if you spend $500 on a non-deductible expense, the business’s taxable income will be reduced by $500 even though it cannot be deducted from your taxes.
As such, having an understanding of what qualifies as non-deductible expenses can help you make wiser financial decisions and manage your tax liability in a more effective manner.
Non Deductible Expenses for Businesses
When running a business, there are many expenses that cannot be deducted from taxes. You should be aware of these nondeductible expenses when preparing your tax return for the 2022 tax year.
Here are ten common nondeductible business expenses to keep in mind:
- Work clothes. The government doesn’t assist with covering clothing costs via a deduction. so if you’re required to wear a certain type of clothing at work, that cost is not deductible. However, you’re able to deduct expenses incurred for clothes not meant for public use such as uniforms.
- Commuting costs. Regardless of how long it takes to travel to and from your business, or the type of transportation you use, commuting expenses incurred are not eligible for tax deductions. This includes gas, vehicle maintenance and repairs, parking fees, and other related costs.
- Business-related gifts. You can only claim up to $25 for gifts given directly or indirectly to each person, even though it may be beneficial to provide a more expensive gift in some circumstances.
- Entertainment expenses. The IRS does not allow deductions for entertainment expenses, such as tickets to see a show or golf outings.
- Capital expenses. A capital expense is an investment made to set up and sustain a business in the long run. These expenses may include acquiring a vehicle, purchasing office furnishings, or getting rights to a franchise. However, the IRS permits deductions of up to $5,000 per year for certain expenses when starting a business, such as the cost of registering an LLC or buying a domain name for a website.
- Meals. Normally, the IRS only allows for a 50% deduction on meals.
- Political contributions. Contributions made to political organizations or candidates, as well as lobbying expenses, cannot be deducted from taxes.
- Life insurance premiums. Companies can deduct the cost of group life insurance for their employees as a business expense. However, you cannot 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.
- Fines and penalties. Generally, government-imposed fines and penalties are not considered deductible expenses, no matter the amount.
- Membership fees. Fees to a country club, social club, or fitness center are not tax-deductible.
- 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.
- 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.
- 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.
- Noncorporate taxpayers with excess business losses. Excess business losses must be treated as a net operating loss carryover for taxation purposes.
- 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.
FAQ
What happens if you claim nondeductible personal and business expenses?
Claiming nondeductible personal and business expenses can have a significant effect on your taxes.
If you deduct these expenses from your business’s taxable income, it will raise the amount of taxes you owe.
If the IRS determines that you have incorrectly claimed a non-deductible expense, you may face an audit and potentially have to pay fines or back taxes.
What is an example of nondeductible taxes?
One example of non-deductible taxes is political contributions. If you are trying to influence legislation or back a particular candidate, any money spent on those activities cannot be deducted from your taxes.
Can you deduct expenses that mix business with personal?
Mixing business and personal expenses (such as family expenses) is something that should be avoided at all costs, especially when you’re starting a new business.
Not only does it create an unnecessarily complex accounting situation, but it can also lead to potential legal issues with the IRS if you’re not careful.
Are work-related travel expenses nondeductible?
Travel costs related to your job can be tax deductible, provided you incurred the expenses while working away from home for one year or less on an assignment.
Can taxpayers deduct entertainment expenses?
Since the start of 2018, businesses have been unable to deduct expenses associated with recreational activities like sports games and shows.
Yet, companies may be able to claim a tax deduction for meals and beverages consumed at entertainment events.
Are business-related meal expenses tax deductible?
Businesses can deduct 50% of the cost of 2023 business-related meals and drinks from restaurants.
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