Do you ever get the feeling that common sense just isn’t very common after all? If you think the tax code is logical and reasonable, you may find yourself claiming expenses for your business that just aren’t deductible. Here, for your information, frustration, and amazement, is a list of the most common attempted deductions that the IRS disallows on a frequent basis. It is possible that some of these expenses could properly be shown on your financial statements and reports (i.e., your Income Statement or Profit and Loss), depending on the reporting basis you are using (GAAP, Tax Basis, …etc). Your tax return, however, will almost always differ from your financial statements to some degree, and these are some common reasons for the difference. To try to close out on a more positive note, I also listed some examples of allowable business deductions that you may be overlooking. Enjoy.
The Bad List:
Charitable Contributions. Your business does not get to deduct charitable contributions as if they are a business expense. They are, however, deductible on the business owners personal 1040, Schedule A.
Dues to business clubs, country clubs, social clubs, or other civic clubs. The meals you purchase at any venue might qualify as business meals, but dues and other assessments for membership are not considered a business expense. The fact that you network or promote your business among the members does not create an ordinary and necessary business expense.
Penalties and fines for broken laws. No matter how late you are or where you are, parking fines, speeding tickets, and other penalties for breaking the law are not deductible.
Political contributions. I like a good pro-business candidate or politician as much as anyone, but a contribution is personal, not business. And as such, it can be deducted on your personal returns.
Life insurance on the owner – even for the purpose of securing a loan for the business. There are a few exceptions, so talk to your accountant or financial professional.
Uncollected invoices, or “Bad Debts” – are only deductible if you have recognized and claimed as income the amount you are not able to collect. Here’s one that needs an example to clarify. If I invoice my client for work I’ve performed, and it becomes highly probable that they are not going to pay the amount due, I definitely feel the loss. It feels like an expense. But if I haven’t included the amount of that invoice in my income, then I have nothing to remove from my income, or deduct. If, however, I report my income on the accrual basis, and therefore that invoice was included in my income even though the payment was not received and isn’t expected to be received, then I can fairly remove that amount from my income, as a Bad Debt Expense.
The Good List
Cell phones. If you provide cell phones to your employees for the benefit of your business – deductible.
Education. More specifically, training or education related to your business.
Gifts to your customers or clients. Limited to $25 per recipient.
Life insurance provided as a benefit to employees, within limits.
Health insurance for you and your family if you’re self-employed. There are limitations, but it’s worth consulting with your tax preparer or financial advisor to determine if you are eligible.
Each of these items, the good and the bad, are subject to exceptions. Even the tax code itself qualifies many of its rules by saying “subject to facts and circumstances of each case…”. Always check with your CPA or a certified tax practitioner when planning your business activities and practices. Making smart decisions in these areas can minimize your business and personal income taxes and can also improve your long-term profitability.