September 23, 2014

Items Your Business Can’t Deduct on Taxes

tax deductions you can't take

While most business expenses can be written off, the tax law contains some pesky limits or bans on deducting legitimate business-related costs. Trying to write these items off may attract unwanted IRS attention, so don’t do it!

Below are five examples of expenditures that are on you. You can’t share their cost with the government via a tax write-off.

Tax Deductions You Can’t Take

1.    Fines and Penalties

Unfortunately a business can incur a government fine or penalty for an infraction or failing to do something that’s required of you. The tax law says it’s nondeductible. Thus, if you’re a trucker and violate state highway weight laws, the penalty for this violation cannot be written off. This rule applies to parking and speeding tickets, even while using your vehicle for business.

You can deduct penalties arising from private contracts. For example, if you’re in construction but fail to complete the job on time, you may have to pay a penalty; it’s deductible.

2.    50% of Meals and Entertainment Costs

Costs you incur to wine and dine clients, customers, vendors, and other business associates are only half deductible. The other half cannot be written off, even though they are legitimate business expenditures.

Fortunately, not every meal and entertainment cost is subject to the 50% limit. Here are some meal and entertainment costs that are fully deductible:

  • Cost of company picnics
  • Snacks you provide in the company kitchen or meeting room
  • Costs for a hospitality suite at a trade show or convention

3.    Repayment of Loan Principal

If you borrow money to start your business, carry inventory, or for any other business purpose, you can deduct the interest on the loan.

However, the portion of each payment representing principal can’t be deducted. Paying off a loan is a considerable drain on cash flow.

4.    Dividends

If your business is incorporated and you want to pay dividends to investors, the corporation can’t deduct these dividend payments. That’s why C corporations usually produce a double tax — once on the corporations when they earn the income and again when they distribute earnings to shareholders who then pay tax on the dividends.

5.    Interest on Tax Deficiencies

If you get behind on your taxes, you’ll owe interest to the government. While the IRS interest rate on individuals currently is modest (3% for the second quarter of 2014), it can mount up if the delinquency isn’t paid off soon.

The interest on taxes related to Schedule C, E, or F — your business income from a sole proprietorship, partnership, limited liability company, or S corporation — is not deductible as a business expense. It is viewed as interest on your personal income taxes, which is not deductible. Remember, personal interest, other than home mortgage interest and student loan interest within limits, is not deductible.

C corporations that pay interest to the government on their back taxes can deduct the expense.

Conclusion

The fact that these five examples highlight nondeductible business-related items doesn’t imply that most business expenses are treated harshly for tax purposes. They are not.

Most items you pay for in your business can be written off — by a deduction or a tax credit. Just watch out for limitations that may affect the timing or amount of a write-off … and in the limited situations in which something is not deductible at all.

When in doubt, consult with your tax professional.

Accounting Photo via Shutterstock

5 Comments ▼

Barbara Weltman


Barbara Weltman Barbara Weltman is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and is a trusted professional advocate for small businesses and entrepreneurs.

5 Reactions

  1. Ooooh that can hurt. But I guess you don’t really have a choice. After all, you cannot expect the government (which is paid by your country’s citizens) to pay for your business expenses. It is only right that it is on you.

  2. Thanks for sharing this important points on Tax deductions. It helps small business owners like us!

  3. I noticed the tax deduction versus tax credit in your article. Could you expand on the difference? Many people are receiving advance premium tax credits under the affordable care act here in Connecticut, Yet no one can explain the difference between a subsidy and a advance premium tax credit. Where to find advance premium tax credit table would also be helpful. Thank You

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