5 things you are spending money on that are not (fully) tax deductible

My accountant says I made $300,000, but I don’t see it in my bank account. Where did it go?

Every year at tax time, business owners call me up and complain that their tax return says they made more money than they see in their bank account. Isn’t it supposed to be the opposite? Aren’t we supposed to be able to deduct things so that our tax return says we made very little? How can it happen that it’s the other way around?

small business tax deductions

5 business expenses that are not (fully) deductible

When you spend money, it’s gone. It reduces your cash on hand. But tax laws have a funny way of looking at “income”. Not everything you spend money on is “deductible”. This means that you can spend money on something, but that money might still be counted as “income” (even though it’s no longer in your pocket). This is how our tax returns can show us as having an “income” that’s higher (sometimes much higher) than the money we put in our bank accounts.

I’m not an accountant. You should talk to an accountant about tax laws because they change a lot, and can differ from state to state. And I’m not giving tax advice, but I want to make you aware of some business tax deductions I see my clients get confused about year after year.

1. Meals and Entertainment

business meal tax deductionsBusiness meals are mostly only 50% deductible. That means when you take a client out and spend $100, your taxable income goes down by $50, but your cash goes down by $100. It’s a bad deal. This is also true for sports tickets, golf or other entertainment expenses; half of what you pay will still end up showing up as income at the end of the year, and you are going to have to pay tax on it.

2. Capital Expenses

capital expense tax deductions 2

Did you buy any new computers or other office equipment? Capital expenses get depreciated over the “useful life” of the equipment. That means that the $2,500 you spent on that computer reduced your cash flow by $2,500 but only reduced your taxable income by $500 (this year). The good news is that for the next 4 years you get to deduct another $500 (even though you didn’t spend any money on it in any of those years).

3. Office Build-outs

office space tax deductions

Office build-outs are just like capital expenses that we talked about above, but I mention them separately because the numbers are bigger and I find folks getting caught by them frequently. When you move into a new office you want to spruce it up. You might put in new carpet, or a coat of paint. Maybe you buy some desks or other office furniture. By the time you are done maybe you spent tens of thousands of dollars–only a fraction of which will be deductible. Yes, the IRS will tax you on 80% of the money you spend on those capital improvements (assuming a 5 year lease)!

4. Automobile Expenses

company carIf you have a “company car” (a car that you pay the lease for through your company) or if you just pay gas and insurance through your company account, then your accountant will likely “apportion” that expense; some to “business” and some to “personal”. The portion that is applied to personal is not deductible. In other words, just because you pay for the car through your business, doesn’t make it fully deductible. Some of that money that you paid out may end up counted as income to you.

5. Personal Expense

Did you charge your dry cleaning on your company card? How about car washes, or a briefcase, or …well, anything that’s not really a business expense? That’s all coming back off of your expenses and will get counted to you as income.

Understanding tax law is one of those boring and uncomfortable things that you just have to learn about as a business owner. If you don’t, it’s going to cost you a lot more at tax time!

How have you been surprised at tax time–for better or for worse? Tell us about it!

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Photo credit:   gareth1953 the originalTax CreditslocaljapantimesMr.Boombust, M 93,

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