There are plenty of perks to business ownership, and tax deductions are one of them. Being able to write off everything from your mileage to your office supplies almost makes up for the other tax-related headaches you need to cope with.
While there are numerous legitimate business expenses, there are a few that you should never try to deduct—unless an audit sounds like your idea of a good time.
1. Never Try Deducting Political Contributions
There’s often confusion surrounding whether or not donations made to political parties and candidates are tax deductible. Here’s the short answer: No.
It’s copacetic to deduct any donations made to charitable organizations. Those are generally 501(c)(3) organizations and are tax-exempt. They’re also prohibited from influencing legislation—which is what clearly separates them from a political cause.
“It may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates,” the IRS explains about 501(c)(3) organizations within its exemption requirements.
In short, don’t confuse your business’ charitable donations with political contributions—they aren’t the same.
2. Never Try Deducting Personal Expenses
You know you can’t deduct expenses that are clearly personal. However, these waters can get dangerously murky.
Take your computer, for example. You use it to do your work, but you also use it personally. That means you need to think twice before writing the entire thing off as a business expense.
Items like computers and vehicles fall under a category the IRS calls “listed property”—which is property that can be used for both business and personal use. It’s worth noting that, in 2010, cell phones were no longer classified as listed property.
For listed property to be deducted, you need to be able to prove predominant use—meaning that item is used more than 50% of the time for business purposes.
These types of expenses are going to require some leg work and additional record keeping in order to not raise any red flags with the IRS (time tracking app can help). So, take extra caution that you aren’t trying to slide any solely personal expenses under the radar.
3. Never Try Deducting Expensive Business Gifts
Yes, business gifts are deductible, but to a very limited extent.
The IRS has a $25 limit on gifts you give to customers, vendors, or other business contacts throughout the tax year.
Does this mean you can’t buy that long-time customer a pricy gift? No. You can still purchase that $100 paperweight—you’ll just only be able to deduct $25 worth from your taxes.
4. Never Try Deducting Clothing That Can Double As Personal Wear
Clothing is another gray area for many business owners, and you’ll need to think long and hard about whether or not something is truly a business-related expense.
For example, a uniform or personal protective equipment that’s required for you to safely do your job is a legitimate tax write-off. But, those new khakis that you’ll wear to the office and on the weekend? Not so much.
Here’s your general rule of thumb: If you can and would wear it outside of work, it’s not tax-deductible.
5. Never Try Deducting Penalties and Fines
Receive a parking ticket when your important business meeting ran longer than expected? It’s tempting to write that off as a business-related expense.
However, that’s not copacetic with the IRS. Any type of fine you incur due to breaking the law is never tax-deductible.
That includes tax-related expenses as well. So, if you were assessed a fine for failing to estimate your taxes last year, you can’t write that off.
6. Never Try Deducting Standard Commuting Costs
The IRS does not allow standard commuting costs to be written off—because everybody needs to get to and from work.
While your daily trip to the office isn’t deductible, there are some transportation expenses that are legitimate.
“Deductible local transportation expenses include the ordinary and necessary expenses of going from one workplace (away from the residence) to another,” explains the IRS, “If you have an office in your home that you use as your principal place of business for your employer, you may deduct the cost of traveling between your home office and work places associated with your employment.”
That means that, while your standard commute can’t be written off, your trip to that offsite client meeting is indeed tax-deductible.
7. Never Try Deducting Cost of Goods Sold
Here’s where things can get more confusing and jargon-filled. The IRS does not allow you to write off the cost of goods sold on your taxes.
What is cost of goods sold? These are costs that directly contribute to the creation of whatever products your business sells. Cost of goods sold can include things like raw materials, storage, and even direct labor.
“Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year,” the IRS says, “If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.”
8. Never Try Deducting Capital Expenses
As opposed to immediate expenses like your utility bill and paperclips, capital expenses are longer-term investments for your business (think real estate, for example). Capital expenses are not tax-deductible, as they’re considered assets for your business.
The IRS states that capital expenses fall into three categories:
- Business start-up costs
- Business assets
Because these expenses are typically much larger, they’re capitalized instead of deducted—meaning the total cost is distributed across the next several years, instead of being deducted all at once.
Why? This provides a much more accurate picture of how profitable your business is. After all, needing to account for the purchase of an $85,000 piece of equipment in one year would drag your gross profits way down.
Remember, Not Everything is Tax-Deductible
In addition to the overwhelming sense of pride and fulfillment, tax deductions are another big perk associated with business ownership. However, you can’t write off everything and hope that it slips by the IRS unnoticed.
There are plenty of legitimate business expenses, but the eight included on this list will raise red flags at the IRS. So, play it safe and avoid them altogether.