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Non-deductible expenses are any type of personal or business expense that is not recognized as eligible for tax exemptions or deductions on annual tax returns. Tax agencies often provide guidelines that help taxpayers determine which expenses are eligible as deductions and which are not. In addition, taxpayers generally must qualify the reasons for an expense before it can be classified as something other than non-deductible.
One of the most common examples of individual expenses considered non-deductible includes the use of personal property for business purposes. This means that employees generally cannot claim miles to and from a place of employment as a deduction or report private cell phone use for business calls on their tax returns. While there are some exceptions, any use of privately owned property that is remotely connected to work is likely to be considered a nondeductible expense. Furthermore, these expenses may even be taxable if the employer chooses to reimburse the employee for their use.
At the corporate level, non-deductible expenses will include a range of costs incurred during the basic operation of the business. Capital expenditures are commonly understood as business expenses, but may or may not be tax deductible, depending on the current state of tax laws and the nature of the expenses involved. In most cases, any business expense that can be classified as a capital expense is unlikely to qualify for any type of tax relief or reduction.
Businesses will also find that all expenses recorded on the books as cost of goods sold will also be classified as non-deductible expenses. This is because the costs are considered part of the standard operation of the business model and are offset against the revenue that business produces. For example, expenses to maintain a physical inventory of parts needed to maintain the manufacturing process will generally not be considered deductible.
Since tax laws are subject to change, it is important to consult the taxing authorities when considering whether certain costs may be classified as deductible or non-deductible expenses. With some types of deductions, there may be a gray area and you need to consider the circumstances surrounding the costs before you can use them for a tax deduction. Businesses operating in multiple international locations will need to comply with the tax laws applicable to each of these locations, which means that what is and is not considered non-deductible expenses in one jurisdiction may have an entirely different classification in another.