After attending her local Chamber of Commerce meetings and presenting, or exhibiting, at various trade shows, small business owner Becky Beach was shocked to learn that the $1,000+ she spent on business attire to look extra stylish and professional was not a deductible business expense. “I was thinking I could deduct the clothing expenses, which is why I paid so much for my new wardrobe,” she says.
“When my accountant told me I could not, it was like being in a budget horror story.”
She’s not the only one who has had a nasty surprise on their tax return. Often, small business owners get some small consolation from the money they spend on business purposes and niceties because they believe it will be tax-deductible at the end of the tax year. And, just like Beach, they are often disappointed.
Sometimes, it’s because of the nature of the expense—many investments self-employed people make are considered capital expenses and are just not tax-deductible—but, other times, it’s because of confusion over the new Tax Cuts and Jobs Act. These new tax laws went into effect for the 2018 tax season and changed a myriad of long-standing rules that applied to individual income tax and business tax.
We talked to some accountants to get the scoop on the business expenses that they routinely find their clients believe might be tax-deductible—but aren’t. While they still might be smart expenses to invest in your business, it’s good to know what the IRS will say about them come tax time.
1. Extravagant gifts
Your customers literally pay your bills, when you think about it, so it’s only natural to want to say thank you with a tangible object of your appreciation—whether it’s at the holidays, on their anniversary of doing business with your company, or after a particularly large or complex project. However, you’ll want to check the price tag on the item you are purchasing, as $25 is all that you are allowed per customer. So, if you want to be able to deduct the whole amount, you should probably choose a smaller bouquet of flowers (or just spring for it if they’re worth it, but don’t expect to be compensated).
2. Volunteer time
Say you’re a graphic artist who bills out your time at a healthy hourly rate, and you do 10 hours of pro bono work, designing a website for a cause that’s dear to your heart. Unfortunately, you can’t write off the fair market value of your volunteer time. Many small business owners tend to think that volunteer time can be deducted the same way charitable contributions can. This is unfortunately not the case.
What you can deduct, however, is your gas and any other travel expenses, such as parking or tolls, if you do your work or attend meetings onsite. Note that the standard mileage rate for volunteer work is different than for business use—at .14 per mile for charitable organizations, versus .58 per mile for business use. You also can deduct expenses if you travel out of town for a board meeting, for example.
3. Daily commute expenses
Say you work in a coworking office space or have a small office. The expenses associated with commuting each day are non-deductible, including your parking. Despite the fact that the travel is being done for work, the IRS still considers it personal use. However, if you drive to a client site or a meeting, those expenses can all be included on your taxes at the .58 per mile driven, as noted above. Another method is to use the “actual expense” associated with using your personal vehicle.
Your car itself—whether a lease or purchase payment—is also not tax-deductible. Another way small business owners might try to skirt this and deduct their car payment is “by slapping a logo on it,” says tax accountant Thomas Williams, but that also would not be admissible.
4. Clothing costs
We already covered the fact that those fancy clothes aren’t deductible—well, unfortunately, neither is cleaning them, says David Danic, director of tax at Summit CPA Group, who finds that many clients want to deduct their drycleaning costs. “However, if you’re traveling for business and need to get the laundry dry-cleaned while away, that is deductible.”
One exception to note is if you are required to wear a uniform for work and have to buy the pieces yourself, you may then deduct that expense.
5. Meals for employees
Love to show your appreciation to your hard-working team by surprising them with pizza? Or, maybe you just like to have specialty brew available to save them a trip to the coffee place? Unfortunately, you can now only deduct 50% of the cost of meals or snacks you buy for your team. Many small business owners learn that the hard way. “We used to have a working lunch every other Friday out of the company’s pocket; I thought our bills were 100% deductible since it was a business expense, so I was surprised when my accountant told me I could only deduct half,” says Harsha Reddy, co-founder and editor-in-chief of SmallBizGenius.
6. Business travel expenses for spouses
If you’re headed to a convention or other meeting that involves business travel, you might want to bring your spouse or family along. Unfortunately, even if the primary purpose of the travel is business-related, you can’t expense the airfare and associated expenses for your significant others.
However, you can deduct your own airfare and lodging, and any registration fees that you incur to attend a trade show are deductible. But, if you are exhibiting, be aware that purchases for samples or gifts are not, says Angleton.
You can no longer deduct business entertainment expenses, such as tickets to a sporting event. “I see a lot of confusion among my clients regarding the new tax laws surrounding business entertainment expenses,” says Evan Reeves Alonzo, a CPA and attorney.
This stems directly from the recent changes wrought by the Tax Cuts and Jobs Act: Prior to 2018, taxpayers were allowed a 50% deduction for both business meals and entertainment expenses incurred. Today, while business meals are still 50% deductible, business entertainment expenses are no longer deductible at all. “If the event includes both a meal and entertainment, the deductible meals portion must be broken out from the total cost of the event,” says Alonzo.
8. Social membership dues
Even if you have great success landing new clients while playing a round of golf or “sweatworking” through a spin class, the IRS disallows any expenses related to membership at social clubs, such as a country club or a fitness club. You may deduct dues for professional business memberships, though, such as the Chamber of Commerce or an industry trade association.
9. All marketing costs
And, finally, you might assume that all your marketing costs are deductible, and ads purchased online, or in print, are indeed deductible, assures Danic. Where it gets more complicated is in website development. He explains that external website costs are categorized and treated in two separate ways, which carry their own specific tax treatments:
- Purchasing a website design in any pre-packaged manner qualifies as “purchased software,” and is amortized over three years.
- Hiring consultants under a contractor relationship would lead to an ordinary business deduction.
Be careful what you deduct
Business expenses like start-up cost and home offices have rules that are easy to understand, while other costs like life insurance and credit card payments get more complicated. The bottom line about business deductions? It’s wise to consult with a tax professional or another professional tax preparer before filling out your Schedule C to ensure that you are not inadvertently trying to claim a business tax deduction that’s actually non-deductible under the law.