Most expenses you incur for your business are tax deductible, but not all. Here are 12 legitimate business-related expenses that you can’t deduct.
For decades, taxpayers could partly deduct entertainment expenses if the purpose was to generate income or provide other specific business benefits.
Entertainment included country club or skiing outings; theater or sporting event tickets; entertainment at night clubs; hunting, fishing, or similar trips; and other vacation trips.
However, the Tax Cuts and Jobs Act permanently eliminated all such entertainment deductions starting in 2018.
The new rules don’t exclude you from giving a client theater or sporting events tickets. It just means you can’t deduct the cost.
The good news is that you can deduct the cost of meals you eat while you’re traveling away from home on business. You can also deduct business-related meals you eat at home with potential customers, consultants, clients or similar business contacts.
The bad news is that the IRS won’t let you deduct all of the cost of such meals. Instead, you can deduct only 50 percent of your total business meal expenses.
The IRS figures you have to eat anyway, so you shouldn’t get to deduct the full cost of any meals.
The cost of driving from your home to your regular business workplace is not deductible. These are commuting expenses, which the IRS considers to be a nondeductible personal expense.
The clothing you wear for work is not deductible if it is also suitable for ordinary streetwear. For example, you can’t deduct the cost of a business suit.
But you can deduct clothing that is not suitable for ordinary streetwear. For example, you can deduct the cost of uniforms or specific work clothes not suitable for personal wear, such as nurse’s uniforms, theatrical costumes, or clothing with a company logo.
If your clothing is deductible, you may also deduct the cost of dry cleaning and other care.
You cannot deduct fines and penalties paid to the government for the violation of any law. For example, you can’t deduct the cost of a parking ticket while driving on business. Nor can you deduct IRS or other tax penalties.
If you give someone a gift for business purposes, the cost is deductible up to a maximum of $25 per person per year. Any amount over the $25 limit is not allowable.
You can’t deduct lobbying expenses or political contributions. Businesses used to be able to deduct up to $2,000 per year to influence local legislation (not including hiring professional lobbyists. The Tax Cuts and Jobs Act permanently eliminated this deduction for 2018 and later.
Although you may have to pay for childcare to work or run your business, it is not deductible as a business expense.
However, there is a child care tax credit available to parents of children under 17. The credit is $2,000 per child. $1,400 of the credit is refundable, meaning you need owe no tax to receive the credit amount.
If you work as an employee, you may have various job-related expenses paid out of pocket. Examples include job-related car expenses, travel, education, or tools.
In the past, you could deduct such expenses as a miscellaneous itemized deduction. However, the Tax Cuts and Jobs Act eliminated this deduction for 2018 through 2025.
The deduction for unreimbursed employee expenses will return in 2026.
If you have job-related expenses, ask your employer to pay them directly or reimburse you for them.
If a client fails to pay you for your services, can you deduct the loss?
Unfortunately, the answer is usually no.
You can claim a bad debt deduction if you lend someone money, and it’s not repaid. But, if you’re a cash basis taxpayer, you get no deduction if a client fails to pay you for your services.
Why this rule? In the eyes of the IRS, you don’t have an economic loss when a client doesn’t pay because you never reported the sale as income. As a cash-basis taxpayer, you only report income from sales when it is received.
Most self-employed people who sell services are cash basis taxpayers.
You can deduct education expenses you incur to maintain or improve the skills you need for your existing business. You can also deduct the cost of continuing education required by law to retain your professional status. For example, real estate brokers can deduct continuing education courses.
But you cannot deduct education expenses you incur to qualify for a new business or profession. For example, IRS agents could not deduct the cost of going to law school because a law degree would qualify them for a new business.
If, like most small business owners, you are a sole proprietor, a partner in a partnership, LLC member, or an S corporation shareholder, the IRS treats any charitable contributions your business makes as a personal contribution by you.
Thus, the contributions are not business expenses and are not deductible as such.
You can deduct them only as a personal charitable contribution. This IRS rule means you may deduct these contributions only if you itemize your deductions on your personal tax return.
Today, only about 10 percent of taxpayers can itemize. The other 90 percent take the standard deduction, which was almost doubled in 2018 by the Tax Cuts and Jobs Act.
If you’re one of the 90 percent who doesn’t have enough personal tax deductions to itemize, such charitable contributions are not deductible.