Being on top of your startup’s finances and taxes is paramount to ensure the maturation of your entity. The knack of navigating financial statements, maintaining accurate financial records, and understanding your tax obligations will go a long way in ensuring your growing venture stays on the right side with the taxman. In addition, and significantly, it can minimize tax liabilities.
Unfortunately, it’s pretty puzzling for many startup owners to classify whether certain expenses qualify as tax-deductible or not. It can be even more intimidating considering different states, regions, and legislations have varying opinions on what costs are deductible and vice versa. Therefore, the concern on which expenses to regard as deductible, non-deductible, or even partially deductible isn’t as straightforward as you might expect.
Obviously, acumen from a certified accountant, a financial controller, or a tax professional can help ensure your startup is compliant with its tax obligations and optimize your deductions. Nevertheless, this post will cover valuable insights on the common non-deductible expenses for your startup.
What are non-deductible expenses
First and foremost, differentiating between deductible and non-deductible expenses is paramount to the sustainability of any business. As the name gives it up, Deductible expenses are expenses that can be deducted from a company’s income before taxation. As such, they help a business generate revenue. But, on the other hand, it’s impractical to subtract non-deductible expenses from your startup’s income.
Predominantly, any personal spending falls under non-deductible expenses. This is also the core reason why it’s vital to separate your personal and business expenses. Still, and as already outlined, several intricacies are at stake when determining non-deductible expenses in your industry and region. For instance, some countries allow certain costs to be deducted while others view them as non-deductible or partially deductible.
Here is an extensive overview of the most general expenses that are non-deductible:
Personal and family expenses are the most typical expenses you can’t deduct. Any expense that doesn’t relate to your business, such as personal motor vehicles outside business hours, can’t reduce business income. Similarly, family expenses are also non-deductible expenses. Moreover, clothing for work is also non-deductible.
As already outlined, it’s vital to distinguish personal and business expenses clearly. Still, it’s prevalent for these expenses to overlap occasionally. Therefore, you can claim a deduction for the portion attributable to your startup.
When it comes to entertainment costs, it can be a little challenging depending on your country’s tax regulations. Some costs are tax-deductible, while others are not. Generally, entertainment costs you spend on clients and employees on items like sporting events, shows, and such are not tax-deductible. However, if you paid for a weekend getaway for team building and such expenses that enhance your employee’s education and skills, these are tax-deductible. To ensure that your startup is compliant with its taxes, it is best that you work with a tax accountant. They will help you ensure that the entertainment costs you claim are tax-deductible.
Political and charitable contributions
Political candidates can play a crucial role in supporting your industry and investing in your startup. Nevertheless, political contributions aren’t deductible on your personal or business tax returns. Unfortunately, this is also the case for campaign contributions.
Although charitable contributions made to qualified organizations are deductible for individuals, the model doesn’t apply to business expenses.
Commuting costs incurred between your home (regardless of how far your home is) and your workstation isn’t deductible. In addition, driving a personal car to and from work every day are personal expenses; hence they are non-deductible. Nevertheless, it’s possible to deduct costs incurred when traveling to see clients and business associates during working hours.
Do you spend time exploring for your startup’s purposes? Unfortunately, expenses incurred when researching business opportunities your startup might capitalize on aren’t deductible.
Capital expenses and equipment
Although it’s practical to deduct some of your startup costs incurred during its launch, you aren’t liable to deduct capital expenses. Capital expenses include costs needed to launch your venture and play a critical role in its traction for more than twelve months—for example, a startup car, office equipment, land, and franchise rights. Nonetheless, you can depreciate business property.
Fines and penalties
In most cases, fines and taxes are non-deductible since they aren’t expenses incurred for producing profits chargeable to tax. Moreover, costs paid to settle violations of any law parking tickets fall as non-deductible expenses.
You can’t deduct bribes, gambling losses, kickbacks, smuggled materials, salaries paid to individuals to handle unlawful tasks, drug trafficking, and illegal payments. So it’s best to seek legal counsel to ensure your startup doesn’t break the law, or else you risk losing essential licenses and tarnishing your reputation.
Other non-deductible expenses
The above expenses are just the standard non-deductible expenses applicable to most locales and industries. Still, some costs might qualify as tax-deductible, or non-deductible, depending on specific contexts. They include:
- Insurance – depending on the legislation in your startup’s locations, some business insurance premiums such as disability insurance aren’t deductible.
- Medical expenses, except for medical exams intended for prospective employee targets.
- Gifts to business associates, customers, vendors, and any party involved in running your startup’s operations. This is especially true if the incentive exceeds a certain amount ($25 in most instances).
- Legal fees incurred in the acquisition of business property.
- Travel expenses for non-staff personnel such as your relative, spouse, or partner. Travel costs are primarily deductible, but that’s not the case for accompanying extra travelers who aren’t part of the business.
- Lost or misplaced cash or property.
- Payments of certain employee expenses, such as reimbursing your team members for moving costs and commuting costs
It is pretty challenging to distinguish between deductible and non-deductible expenses clearly. Depending on your startup, you might have a varying list that you can claim for tax deductions. Although saving on taxes can go a long way in contributing to your startup’s success, non-compliance can be detrimental to your venture’s health. Therefore, it’s paramount to be familiar with these non-deductible expenses and be on top of your startup’s taxes.