Vlad Rusz is a CPA at Centaur Digital Corp, helping busy business owners efficiently manage their accounting system.
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Some business owners are very conservative and only deduct expenses that are crucial to running their business, while others are lax and attempt to deduct personal expenses. These are two extremes of the same spectrum; the optimal solution, of course, lies somewhere in between. Business owners should deduct all expenses that are ordinary and necessary to run their business.
The issue? Sometimes the line between a business and a personal expense is blurred. In addition, there are IRS guidelines for specific expenses that add complexity in determining if the expense is deductible. This article explores six common nondeductible expenses for small-business owners.
1. Personal Grooming
Generally, expenses such as haircuts, manicures, pedicures, etc. are not deductible. While most business owners have to be presentable and might spend a significant amount of money on personal grooming, so too do most professionals. Since someone without a business would have no mode to deduct these expenses, business owners are not allowed this deduction either.
2. Gym Membership
It’s become a common perk for many employees to receive a complimentary gym membership. While the benefits to employers of a healthy, active workforce are numerous, gym memberships are generally not deductible when provided to business owners. This rule applies to a broader category of fringe benefits that can be provided tax-free to employees but not to business owners.
3. Personal Vehicle
The use of a company car is a great employee perk. Business owners can also benefit from this perk, but there are restrictions. For business owners and employees alike, having a company vehicle that is used for personal reasons is not a tax-free benefit. The IRS only allows a tax deduction for the business use of a vehicle.
4. Household Employees
Sometimes a business owner can be more productive working if someone else is cleaning the house and babysitting their children. However, there are no tax deductions available for payments to household employees. The payments to a babysitter or nanny might qualify for the child care tax credit, but it’s a small credit with minimal tax savings even for those who qualify.
5. Clothes
Any clothes that you can wear in public are generally not deductible. Even having a small logo on a shirt will not make it a tax deduction. There can be some exceptions for clothes that prominently display a logo if the value derived from the garment is advertising. Buying a stylish suit or dress for a meeting, while it might be required and prudent to do, is not deductible. A similar person without a business buying a suit for a job interview does not get a deduction, and thus neither do business owners.
6. Groceries
The meal expenses that many business owners are familiar with do not apply to groceries. Among other requirements, meals have to be purchased already prepared to be deductible. There is a small exception for stocking the break room with snacks or buying lunch for the office, but it only applies to businesses with many employees.
The administrative burden for most businesses to properly account for personal expenses is costly, so it’s best to know what is and isn’t deductible. Additionally, commingling funds can pierce the corporate veil and cause a loss of limited liability for the owner. The best way to handle these transactions is to pay all personal expenses from a personal bank account and not combine these expenses with business ones.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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