There are certain costs you may incur for your company that make good business sense. Unfortunately, the tax law doesn’t view them all as write-offs. Here are 10 expenses you may incur in or related to your business but you can’t deduct them (in whole or in part).
Non-Deductible Business Expenses
Additional Medicare Taxes
The 0.9 percent additional Medicare tax paid on net earnings from self-employment or employee wages (if your income is high enough) and the 3.8 percent net investment income tax paid on income from investments (e.g., a business own but don’t participate in on a day-to-day basis), again if your income is high enough, are personal taxes that are non-deductible.
Clothing for Work
While many people in business want to dress for success, the government doesn’t help to underwrite the cost by permitted a deduction. Only clothing not suitable to street use (e.g., uniforms, hardhats, etc.) can be deducted.
Commuting To and From Work
No matter how lengthy or difficult it is to get to your business and home again or what mode of transportation you use, you can’t write off the cost.
Dues to a Country Club
Even though golf or tennis may be a great way to meet and network with clients and customers, the dues aren’t deductible. The same is true for social clubs and fitness centers. But if you have a business lunch at your club, half the cost of the meal can be deducted.
The money you spend to research business opportunities that you might go into isn’t deductible. Once you actually start a business, expenses treated as start-up costs can be deducted in the first year within certain limits.
Fines and Penalties
Government-imposed fines and penalties are usually non-deductible, regardless of the amount.
Gifts to Business Associates, Customers, Vendors, Etc.
The deduction is capped at $25 even though it makes good business sense to give a more expensive gift in certain situations.
Half of Meals and Entertainment Costs
Only 50 percent is deductible in most cases. There are some exceptions, such as company picnics or break room snacks, when a deduction for the full cost is permissible.
Interest on Tax Underpayments for Non-corporate Taxpayers
Sole proprietors and owners of pass-through entities that pay interest on tax underpayments cannot deduct them. The interest is viewed as personal interest even if it relates to business income.
Legal Fees to Buy Property
These fees are added to the cost basis of the property. A portion of the fees (the part allocated to the cost of the building and not the land) may be recovered through depreciation.
Impact of Non-Deductible Business Expenses
Your “book income,” which is the net amount on your books and records, may not match up with your taxable income, which used for tax reporting purposes. In other words, your net profits from a financial standpoint may not equal the net profits on your tax return.
The discrepancy is reconciled on Schedule M-1 of Form 1120 for C corporations, Form 1120S for S corporations, and Form 1065 for partnerships. But you don’t have to complete the M-1 for the 1120S or 1065 if total gross receipts are less than $250,000 and total assets at the end of the year are less than $250,000 (for an S corporation) or $1 million for a partnership; it’s still a good idea to do so because it can answer questions that could be on an IRS examiner’s mind. Large entities — those with $50 million or more in assets — must use Schedule M-3 for this purpose; those with $10 million to $50 million may use Schedule M-1 instead of Schedule M-3.
Sole proprietors and independent contractors filing Schedule C of Form 1040, regardless of the amount of gross receipts or assets, don’t have to do any reconciliation. But they should recognize that their financial statement is not necessarily identical to their tax return.
Work with a CPA or other tax advisor to optimize your deductions and to understand how non-deductible items impact your taxes and financial statements.
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