Taking all the tax deductions to which you’re entitled is only smart business, right? But you may be surprised to know that the IRS doesn’t allow deductions for certain expenses that, on the surface at least, seem completely valid. Here are some of the expenses you cannot deduct:
Work Clothes. That new business suit or those practical shoes may be essential for presenting yourself as a serious professional. But unless they’re not typically worn on the street – like a uniform, hardhat, work gloves or hospital scrubs – they’re not deductible for taxes purposes.
Commuting to Work. You might really enjoy that Sirius radio station while driving to work, but you can’t deduct the commuting expenses you rack up on the way to or from your workplace. You may, however, deduct expenses you incur in going to meet clients or customers, or in doing other business-related commuting, once you’re at work.
No Free Lunches. Typically, you can deduct only 50% of meals and entertainment costs for meetings with clients or prospects, which basically means you can deduct what you pay for the other guy but not yourself. There are some exceptions, of course. A company party you throw for employees or a basket of fruit in the employee break room for a healthy snack would be generally allowable.
Extravagant Gifts. While you might feel generous in giving a gift to a business associate, customer or vendor, you may only deduct a maximum of $25 for a gift to each person. For now, employers may deduct the full amount of gifts and awards to employees, though in most cases this is taxable income to each employee.
Underpaying Doesn’t Pay. Sole proprietors and owners of other pass-through entities (such as single-member LLCs or S-corps) who don’t pay enough estimated tax during the year and therefore incur interest on their tax underpayment can’t deduct it. The IRS views interest as personal interest even if it relates to business income.
Panning for Gold. So, you think you might want to start a business or go into a whole new field. You spend some cash to explore these opportunities, doing research and generally finding out what you might be getting into. Good for you! Just don’t try to claim these as business deductions on your taxes. Of course, once you actually start a business, any expenses you classify as startup costs can be deducted in the first year, though certain limits apply.
The tax reforms currently moving through Congress could eliminate or change these deductions in the future. It pays to hire an accountant who stays current on all tax deductions and other tax laws and regulations.
1-800Accountant – a virtual accounting firm merging the convenience of technology with live support from real professionals – can optimize your deductions and help you understand how non-deductible items can impact your taxes and financial statements. We offer personal, year-round accounting services to individuals and small businesses at an affordable price. As tax filing deadlines approach, consider scheduling your consultation with America’s leading small business accounting firm.