The 2023 tax filing season is here, and with it comes a range of nondeductible expenses that could affect your finances. Whether you’re filing taxes on your own or as part of a household, being aware of what isn’t deductible can help you plan better for the upcoming year.
Nondeductible business expenses are costs that a business cannot subtract from its 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 what these nondeductible expenses are and taking steps to limit them, you can reduce the amount of taxes your business owes.
Nondeductible expenses don’t directly impact taxable income but do reduce the total profit that is reportable on your taxes. For instance, if you spend $500 on a nondeductible expense, the business’s taxable income will drop by $500, even though it can’t be deducted on your taxes. Knowing what qualifies as nondeductible can help you make smarter financial decisions and manage your tax liability more effectively.
Here are some common nondeductible business expenses to keep in mind when preparing your tax return for the 2022 tax year:
1. **Work clothes:** Costs for work-related clothing are not deductible unless they are uniforms or not suitable for public wear.
2. **Commuting costs:** Travel expenses to and from work, including gas, vehicle maintenance, repairs, and parking fees, are not deductible.
3. **Business-related gifts:** You can only deduct up to $25 for gifts given to each person, even if the gift is more expensive.
4. **Entertainment expenses:** Expenses like tickets to shows or golf outings are not deductible.
5. **Capital expenses:** While certain startup costs up to $5,000 can be deducted, investments like buying a vehicle or office furniture are generally not deductible.
6. **Meals:** The IRS typically allows only a 50% deduction on business-related meals.
7. **Political contributions:** Donations to political organizations or candidates, and lobbying expenses, are not deductible.
8. **Life insurance premiums:** Costs for life insurance are not deductible if you or someone with a financial stake in the business is the beneficiary.
9. **Fines and penalties:** Government-imposed fines and penalties are not deductible.
10. **Membership fees:** Fees for country clubs, social clubs, or fitness centers are not deductible.
Other nondeductible expenses include interest on tax underpayments for non-corporate taxpayers, legal fees for property purchases which can only be recovered through depreciation, certain employee commuting costs, and excess business losses for non-corporate taxpayers. Additionally, hobby losses are not deductible since the IRS views hobbies as activities done for enjoyment rather than financial gain.
If you claim nondeductible expenses, your taxes will increase. Incorrectly claiming these can lead to an audit, fines, or having to pay back taxes. For example, political contributions cannot be deducted. It’s best to avoid mixing business with personal expenses to prevent complex accounting situations and potential legal issues with the IRS.
Work-related travel expenses are deductible if they are incurred while working away from home for one year or less on an assignment. Since 2018, businesses can’t deduct entertainment expenses like sports games and shows, but can claim a deduction for meals and beverages at such events. Businesses can also deduct 50% of the cost of meals and drinks related to 2023 business activities at restaurants.
