Taxes aren’t always that straightforward. Learn what can and can’t be deducted from 10 common expense categories and file your taxes with ease this year.
When it’s time to tally up your business expenses for tax season, it isn’t always easy to determine what are and are not tax deductions for your small business. The rule of thumb is that you can deduct most expenses that are only for business and not personal use, but what if there’s a gray area?
To help make taxes this year a bit easier, we’ve put together a list of 10 common categories of expenses and examples of deductions that you can and can’t file for your business. Follow this guide as you do your taxes to make sure you aren’t missing anything this year. You may be surprised to discover some new creative tax deductions for small business that you’ve never considered.
- Wardrobe, fashion, and beauty
- Charity, donations, and giving
- Club dues and membership fees
- Fines and penalties
- Meals and entertainment
- Diet, fitness, and coaching
- Luxury costs
Get ahead of tax season
1. Wardrobe, fashion, and beauty
Imagine you could write off any expense that was related to business–with absolutely no limitations. You can probably picture the chaos that would ensue. People could theoretically write off a $25,000 Hermès Birkin handbag as long as they justified that they used it only to carry work materials.
In reality, we can’t just buy the most expensive bags and clothing and find a loophole to deduct them (sorry!) Consider the following: • That designer suit you wear “only for meetings”?
• The running shoes you bought to (professionally) walk dogs?
• The manicure, haircut, or personal training you had before your big presentation?
Those are not going to be tax-deductible expenses. Unless that polo shirt has your company’s logo on it, any clothing or fashion accessory that you bought (even “just for business”) is not on the IRS’s list of acceptable expense deductions for your business.
A rare example of an acceptable fashion expense deduction is if you purchased “theatrical clothing” (aka clothing you would not be able to reasonably wear in the place of regular clothing). Most independent business owners won’t ever deal with this category, but it could apply to actors and other types of entertainers.
Here are a few questions the IRS may ask you in an audit, to determine if your wardrobe expenses are deductible:
- Did someone other than yourself (your client, for example) instruct or require you to purchase this wardrobe item in order to perform work for your client?
- Does the clothing clearly feature your business name or logo (or that of your client)?
- Is the item only intended for reasonable use in the course of normal business?
- Is the item otherwise unsuitable for everyday wear, or can not take the place of your regular clothing?
“No” answers to any of the above would significantly reduce the likelihood that the IRS would accept these expenses as being deductible. (For more specifics, check out IRS Publication 529).
2. Charity, donations, and giving
Most of us know that charitable donations are tax deductions, but did you know that the organizations you choose have to hold tax-exempt status with the IRS?
If you were to donate $25,000 to a local organization without checking its website or registration, you could end up with $25,000 more in taxable income than you expected. That’s just one example of a charitable expense that you can’t deduct.
Other donations that are not considered tax-deductible include:
- Contributions to organizations that do not hold tax-exempt status
- Contributions to a political party, candidate, or political action committee
- Donating “your time” (ie: claiming a monetary value for the time you volunteer with an organization).
- Claiming above fair market value for the belongings you donate to a thrift store, charity, church, or other non-profit organization.
So, what can be deducted from taxes in the charitable space? Typical donations made in the name of your business can be deducted, but they have to be made without “reasonable expectation of financial return commensurate with” the amount you donated.
Basically, the donation cannot be made expecting anything in return for your business. Check out more specifics in IRS Topic No. 506 Charitable Contributions.
3. Club dues and membership fees
The membership dues of joining or belonging to a club, regardless of the promising client referral opportunities, are not tax deductions.
Examples of memberships that are not considered tax-deductible:
- Fitness clubs
- Social or dining clubs
- Country clubs or yacht clubs
However, some memberships (like qualified professional organizations, i.e. AIGA if you’re a graphic designer) may be tax deductions. These organizations include the following types:
- Boards of trade
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Professional organizations such as bar associations and medical associations
- Real estate boards
- Trade associations
To determine what can be deducted from taxes in regard to your memberships, consider if the membership or organization exists for social or entertainment purposes. If so, it can’t be deducted. To find out more, see IRS Publication 535.
4. Fines and penalties
Paying off your parking ticket is not considered tax-deductible. No matter how many speeding tickets you racked up getting to your client’s location or parking tickets when you stay late, the IRS won’t cut you any slack on these.
Also, don’t even go there if attempting to deduct anything in connection with anything you’ve done illegally.
Some examples of fines that can’t be deducted include costs rising from penalties, fines, or otherwise from violating the law, including:
- Parking or speeding tickets
- Late fees
Unless you pass the IRS’s “For-Profit Endeavor Test,” your hobby is not a tax deduction, even if you sell several bespoke scrapbook layouts to friends.
For example, if you make a living as a photographer but you DJ as a hobby, you can’t deduct charging your friend to DJ at their party or for one-off jobs.
The IRS clearly defines the difference between a hobby and a job with the following questions:
- Do you depend on income from the activity?
- Have you made a profit in similar activities in the past?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Does the time and effort put into the activity indicate an intention to make a profit?
- If there are losses, are they due to circumstances beyond your control, or did they occur in the startup phase of the business?
- Have you changed methods of operation to improve profitability?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
6. Meals and entertainment
You can only deduct 50% of the value of your legitimate business meals or entertainment expenses. Abuse or over-utilization of this category greatly increases your chances of getting further audit review.
Good news: most accounting apps will automatically deduct only 50% if you categorize the expense to “Meals & Entertainment.” Avoid the following tax traps:
- Deducting the entire value of the meal or entertainment receipt.
- Deducting what the IRS considers “lavish or extravagant.” A meal isn’t lavish or extravagant if it is reasonable based on the “facts and circumstances.”
Learn more details on the IRS’s rules for meals and entertainment.
7. Diet, fitness, and coaching
Unless your doctor ordered it, your personal trainer doesn’t count as a deduction.
Expenses incurred for a healthy lunch on your own, gym fees, yoga classes, running shoes, or coaching costs are not deductible as they fall squarely in the personal expense category.
Examples of diet, exercise, or fitness expenses that are not considered tax-deductible include:
- Healthy meals or snacks
- Gym membership fees or classes
- Personal trainers, instructors
- Fitness equipment or apparel
The only health-related expenses that business owners can deduct have to do with medical and dental expenses. To learn more, see IRS Publication 502.
Flying to Hawaii won’t count as a tax deduction just because you spent five minutes in a meeting. You need to demonstrate a reasonable intention that the travel was primarily intended for business if you’re planning on deducting it from your taxes.
If you want to be able to deduct your travel costs, you need to demonstrate that at least one of the exceptions below is true:
- You did not have substantial control over the timing and logistics of the trip, and destination transit. (Note: Being self-employed, you probably shouldn’t try to claim this exception.)
- If traveling outside the US, you were not abroad for more than 7 days.
- If traveling outside the US and you were abroad for more than 7 days, you spent less than 25% of your time on personal activities.
- Vacation was not a major consideration.
To learn more about the nuances of acceptable travel expense deductions, see IRS Topic No. 511.
No matter how stressful your journey from your home to your office is, your daily commute is unfortunately not deductible.
Although you can deduct the costs for traveling between your home and your client’s site, you can’t deduct the cost of traveling between your home and your office (or coworking space, or coffee shop).
Yet, when it comes to recording your mileage for tax deductions, one quick tip is to make your home your principal office. That way, you can still take mileage deductions for trips to your secondary office as well as any business trips to and from your home. For more info, see IRS Topic No. 510.
10. Luxury costs
Discretionary, luxury costs are generally not deductible. Even if you’re a fashion blogger, purchasing a new handbag “for research” is almost always not an acceptable expense deduction.
Unless you are in a for-profit profession selling the produce you grow on your property, you can’t deduct the costs of growing your fruit or vegetables.
You also can’t deduct the cost to stable your riding horse, groom your purebred show dog, or keep your art glass collection clean.
Stay educated and organized for tax season
Now that you know some of the most common types of expenses that can and can’t be deducted from your taxes, take a look at our full list of creative tax deductions. These expenses can be deducted and help you lower your overall tax bill this year.
As you head into tax season, stay organized with a CRM for small businesses that lets you keep track of expenses, income, and more. Check back on the HoneyBook blog for more tax content as well as to stay educated and informed.
Easily keep track of all your clients and projects using HoneyBook.
This article is intended for general educational purposes based on generalizations and does not replace professional accounting, investment, legal, tax or business advice and is based on the IRS guidance for tax year 2023. You should employ the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.