The IRS is pretty strict when it comes to deducting expenses and some of their restrictions may surprise you at tax time. When is a Business Expense Not a Business Expense?
Answer: When the IRS says it isn’t. This detail can cause many headaches for small-business owners, especially those who keep track of their own accounting. When managing your company’s accounts, you should follow what are known as Generally Accepted Accounting Principles or GAAP. For many small businesses, GAAP is pretty straightforward. But when it comes time to prepare your taxes, the rules that the IRS uses can differ from GAAP; this is why companies need to keep two sets of accounting records; one for management purposes and one for tax purposes.
The IRS rules tend to be more strict, especially when it comes to figuring out what is and isn’t an expense that can be used to reduce your taxable income. Fox Business points out some expenses that are not allowed by the IRS for tax purposes:
- Commuting expenses: you can’t deduct the cost of going from home to work;
- Fines and penalties: speeding tickets, parking tickets and anything related to breaking the law isn’t deductible;
- Life and disability insurance premiums for the owner: these are only deductible of your business is structured as a C-Corp;
- Club memberships: any type of membership fees whose main purpose is entertainment, such as a country club, are not deductible; this includes gym memberships.
A little about Mike Periu
Periu founded Proximo, LLC nearly 15 years ago. The company provides small business education and training services with an emphasis on finance and technology.
Periu teaches empowerment through entrepreneurship and economic opportunity. He regularly appears on television and radio talking about these subjects.
Periu also writes for leading blogs about finance. These include: American Express OpenForum, Yahoo! Finanzas and the Huffington Post.
Periu studied Finance and International Business at Georgetown University. He is a Board member at the Council for Economic Education.