What Cannot Be Written Off as a Business Expense?

For tax purposes, the Internal Revenue Service (IRS) generally requires business expenses to be “ordinary and necessary” to be deductible. An ordinary expense is common and accepted in a particular industry, while a necessary expense is helpful and appropriate for the business. However, not all business expenditures qualify for a tax deduction. Some are explicitly non-deductible due to their nature, purpose, or a personal component.

Expenses with a Personal Component

Expenses with a personal purpose or significant personal benefit are not deductible, even if related to business activities. The IRS scrutinizes expenses to ensure they are directly connected to the active conduct of a trade or business. For instance, the cost of commuting between one’s home and primary place of business is a personal commuting expense and is not deductible. This applies even if an individual works from home and travels to an outside office.

Personal use of business assets also falls under this non-deductible category. If a business vehicle, phone, or computer is used for both business and personal activities, only the portion directly attributable to business use can be deducted. For example, maintaining a detailed mileage log is necessary to differentiate business from personal miles for vehicle expense deductions. Similarly, for a mobile phone, only the percentage of usage for business calls or data can be claimed.

Clothing suitable for general wear, even if worn for work, is not deductible because it is adaptable for personal use. The cost of a uniform or protective gear specifically required for a job and not suitable for everyday wear can be deducted. Personal grooming expenses are also non-deductible. While business meals can be partially deductible, purely personal meals and entertainment, even if discussed with a client, are not.

Claiming a home office deduction requires strict adherence to IRS rules regarding personal use. The space must be used exclusively and regularly for business, and it must be the principal place of business or a place where clients regularly meet. For example, using a dining room table for occasional work does not qualify, as it is not exclusively used for business. Taxpayers can choose between a simplified method, offering a standard deduction per square foot (up to $1,500), or the regular method, which allows deducting a percentage of actual home expenses like mortgage interest, utilities, and repairs based on the business-use percentage.

Capital Expenditures

Capital expenditures are investments in assets with a useful life extending beyond the current tax year. Unlike ordinary business expenses, which are fully deductible in the year incurred, capital expenditures are not immediately expensed. These include costs for acquiring or improving assets such as machinery, equipment, buildings, significant property improvements, or intangible assets like patents and copyrights. The IRS requires these costs to be “capitalized,” meaning they are recorded as assets on the balance sheet.

Instead of a direct deduction, the cost of these assets is recovered over time through depreciation, amortization, or depletion. Depreciation applies to tangible assets, accounting for their wear and tear or obsolescence over their useful life. Amortization is used for intangible assets, while depletion is for natural resources. The Modified Accelerated Cost Recovery System (MACRS) is the primary method for depreciating most business property.

For instance, purchasing a new delivery vehicle or renovating a business office are capital expenditures. The full cost cannot be written off in the year of purchase; instead, a portion is deducted each year over a period defined by IRS regulations, typically several years depending on the asset type. This approach reflects the long-term benefit these assets provide to the business. Provisions like Section 179 expensing or bonus depreciation allow for accelerated deductions for certain qualified property, but these are exceptions to the general capitalization rule.

Fines, Penalties, and Illegal Payments

Payments made for violations of law or public policy are explicitly non-deductible for tax purposes. This rule disincentivizes illegal or negligent behavior. For example, traffic tickets, parking fines, and court-imposed penalties, such as those for environmental violations or late tax payments, cannot be deducted. Internal Revenue Code Section 162 disallows deductions for amounts paid to a government entity in relation to the violation of any law.

This prohibition also extends to illegal payments like bribes, kickbacks, or other payments unlawful under federal or state law. Such payments are considered contrary to public policy and are not permitted as business deductions. Narrow exceptions exist for amounts paid as restitution or to come into compliance with a law, provided these amounts are properly established and identified. However, the general principle remains that payments resulting from a breach of law or ethical conduct are not tax-deductible.

Other Specific Non-Deductible Items

Other categories of expenses are specifically non-deductible or have very limited deductibility, often due to public policy or perceived personal benefit. Business entertainment expenses are no longer deductible. This includes costs for activities like taking clients to sporting events, concerts, or golf outings. However, business meals remain 50% deductible if they are not lavish or extravagant, the taxpayer or an employee is present, and the food is provided to a business associate with a business purpose.

Lobbying expenses and political contributions are also non-deductible. This includes amounts paid to influence legislation, participate in political campaigns, or directly support or oppose any candidate for public office. This disallowance prevents businesses from deducting costs associated with influencing public policy or elections. Similarly, dues paid to clubs organized for pleasure, recreation, or other social purposes, such as country clubs or athletic clubs, are not deductible.

Even if an expense is business-related, it may be disallowed if considered “lavish or extravagant.” While the IRS does not provide a specific dollar limit, an expense is not lavish or extravagant if it is reasonable considering the facts and circumstances. This standard suggests that while conducting business at a high-end restaurant may not automatically be deemed lavish, expenses significantly higher than what is reasonable for the circumstances could be partially or fully disallowed.