Understanding Nondeductible Expenses for Business Owners

Non-deductable-expenses

As an independent contractor, sole proprietor, or small business owner, you’re subject to more taxes than employees. At the same time, you’re also eligible for more tax deductions. In fact, one of the many benefits of working for yourself is the ability to lower your taxable income by writing off certain business expenses (like mobile phone and internet bills, continued education, or work travel), in addition to some personal expenses. 

However, not every business or personal expense is tax deductible. If you deduct an expense on your tax return that isn’t eligible, you could risk a tax audit or penalty. While the tax code changes slightly from year to year—with new deductible expenses added and removed—it’s helpful to be aware of what are generally considered nondeductible expenses, both federally and locally.

What are nondeductible expenses?

Nondeductible expenses are personal or professional costs you cannot subtract from your gross income when filing your taxes. Deductible expenses, on the other hand, are costs you can subtract, lowering your tax liability.

In the US, most individual taxpayers have two options when it comes to tax deductions. You can claim a standard deduction, which is a set amount (adjusted each year for inflation) not subject to taxation based on factors such as your filing status, age, disability status, and whether you are claimed as a dependent by someone else. 

Alternatively, you can claim itemized deductions, which is when you subtract specific eligible expenses from your gross income. If you believe your deductible expenses will exceed the amount of the standard deduction ($13,850 for individual taxpayers in 2023), then it makes sense to spend the extra effort and itemize. You only need to be concerned about nondeductible expenses if you itemize.

What expenses are nondeductible?

Nondeductible business expenses are usually business expenses the government has deemed indirectly related to your work or non-essential for your work. While you may associate these expenses with the cost of running your business, you can’t write them off on your taxes. 

Different states and cities have different policies on certain expenses. Some places may let you partially deduct an expense, while others won’t. You may want to consult an accountant or tax professional to make sure you understand your local regulations. The following expenses are generally nondeductible.

Capital expenses

Capital expenses are expenses related to launching your business. The Internal Revenue Service (IRS) generally does not consider expenses incurred before you begin operations as deductible expenses, such as buying or renting business vehicles or purchasing business property.

However, you may be able to recover some of your capital expenses in later years by deducting depreciation or amortization. In addition, the IRS does allow you to deduct some expenses of starting a business (typically up to $5,000 a year), such as the registration fees for setting up a limited liability corporation (LLC) or purchasing an internet domain name. 

Travel expenses

Everyday travel expenses, such as commuting costs to and from your office or coworking space, are nondeductible. Expenses related to a specific business trip—such as a client meeting held outside of your typical workspace—are tax deductible. (Of course, the deduction only applies to expenses for individuals directly involved in your business; you can’t deduct expenses for a spouse or a friend coming on a work trip.)

Meals

Meal expenses are partially deductible. In general, you can deduct 50% of your food and beverage costs related to your work, such as meals with a client, supplier, employee, partner, or adviser. The Consolidated Appropriations Act of 2021 temporarily increased the deductibility of business meal expenses to 100% in 2021 and 2022 (it expires in 2023), as long as the meal was at a restaurant.

You can, however, deduct the full expense of meals in certain cases. For example, depending on local regulations, you may be able to fully deduct food and drink expenses if they’re related to social activities for employees (such as holiday parties) or if they’re part of a service sold to customers (such as supplies purchased for a business that will cater a company event). 

Entertainment

Entertainment expenses are almost always nondeductible, such as nightclubs, athletic clubs, theaters, or sporting events. The cost of entertainment facilities, such as a pool, tennis court, or vacation home, is also nondeductible.

However, if food and drinks are part of the entertainment, you can deduct some of those meal expenses. Such expenses must be purchased separately from the entertainment (as shown on a receipt or invoice).

Gifts

Gifts are partially nondeductible. While you can spend as much as you would like on clients, employees, partners, or others, you cannot deduct more than $25 per gift recipient.

Political contributions

Political contributions and lobbying expenses, including any expenses for participating in a political campaign for public office, are nondeductible. Even if your support for a candidate is directly related to your business, you cannot write-off those costs as tax deductions. 

Political contributions include any indirect contributions, such as advertising for a political party’s convention or publication, tickets for political dinners, or tickets to an inaugural ball or similar event identified with a particular party or candidate.

Nondeductible expenses FAQ

Where do nondeductible expenses go on tax form 1040?

You do not report nondeductible expenses on your individual income tax return.

What personal and business expenses are never deductible for tax purposes?

The regulations are different in every state and city, but there are several personal and business expenses that are almost always nondeductible, such as entertainment expenses, political contributions and lobbying expenses, gifts (over $25), and commuting expenses.

What makes an expense deductible?

A deductible expense is an expense the government has deemed necessary or directly related to operating your business. If an expense is deductible, it means you can subtract it from your gross income when filing taxes.

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