The IRS is fairly generous when it comes to tax deductions for small businesses. As a general rule, a business can write off any ordinary and necessary expense it incurs. There are, however, some notable exceptions to that rule. These eight expenses seem like legitimate deductions — but can be difficult or impossible to write off.
1. Gifts for Customers
Business gifts are deductible — but to a very limited extent. The IRS allows taxpayers to deduct the first $25 worth of gifts to a customer. That means if you give a $25 gift to 10 different customers, you could take a total deduction of $250. But if you give a $250 gift to one client, you could only deduct $25.
2. Business Clothes
Unless it’s a uniform you have to wear for work or a form of protective equipment, clothing or shoes you buy for work aren’t deductible.
3. Commute Costs
If you travel for business using your own vehicle, feel free to deduct the mileage at the IRS standard rate, which is currently 57.5 cents per mile. Your commute to your place of business, however, can’t be deducted. To account for this, you need to subtract the length of your commute if you visit a client site instead of your place of work. For example, say your office is a 10-mile round trip from your house and instead you go straight from your home to a client site for the day. If the client’s location is 30 miles from your house round trip, you can only deduct 20 miles (30 miles minus your usual 10-mile commute).
4. Eating Out
If you take a client out to lunch, you can deduct half of the cost as meals and entertainment expense. However, if it’s just you, or if the lunch has no business connection to it, it’s not deductible.
5. Fines or Penalties
Any fines or penalties levied against you for breaking the law aren’t deductible. That means that you can’t deduct traffic or parking tickets even if you receive them when traveling for business.
6. Life Insurance Premiums
On the whole, any benefit premiums or payments you make on behalf of your employees are deductible, but there’s an exception for life insurance premiums. If you pay the premiums and your business is not the beneficiary of the plan, you can deduct them. But if your business is a beneficiary or receives some sort of indirect benefit if the employee dies, you can’t deduct the premium payments.
7. Political Donations
You can get a write-off if your business donates to a registered 501(c)3 charity. You cannot, however, deduct donations made to a political organization or a political candidate. Any expenses you incur to lobby the government — or pay a group to lobby on your behalf — aren’t deductible, either.
8. Cell Phone Expenses
You use your cell phone for work calls, so the bill is deductible, right? Not necessarily. Thompson Tax and Accounting [PDF] explains that cell phones are considered to be listed property by the IRS and require some extra legwork to deduct. Phones, along with computers and cars, are items that often have both a business and personal use. You can only write off the business portion of the expense, so you need to calculate what percentage of calls were for business and only deduct that percentage of the expense.