There are some types of expenses that are directly related to operating a business, yet are are not deductible under any circumstances. In these cases, Congress has declared that it would be morally wrong or otherwise contrary to sound public policy to allow people to deduct these costs. These nondeductible expenses include:
- lobbying and political expenses
- fines and penalties, and
- illegal payments.
Lobbying and Political Expenses
No business deduction is allowed for political or lobbying expenses. These include payments to:
- influence legislation
- help a political candiate or campaign
- attempt to influence the general public regarding elections, legislative matters, or referendums, or
- directly communicate with a covered executive branch official to influence the person’s official actions or positions.
Thus, for example, a business cannot deduct the cost of attending a dinner or other event whose proceeds are used to benefit a political candidate or party.
However, a business may deduct up to $2,000 per year in expenses to influence local legislation (state, county, or city), not including the expense of hiring a professional lobbyist (such lobbyist expenses are not deductible).
Fines and Penalties
Fines and penalties a business pays to the government for violation of any law are never deductible. For example, a business owner may not deduct tax penalties, parking tickets, or fines for violating city housing codes. (IRC § 162(f).) In addition, a business may not deduct two-thirds of any damages paid for violation of the federal antitrust laws. (IRC § 162(g).)
For obvious reasons, illegal payments are never deductible. (IRC § 162(c).) These include:
Bribes paid to government officials located in the United States are not deductible. However, bribes paid to foreign government employees are disallowed only if they violate the Foreign Corrupt Practices Act.
A kickback is a payment for referring a client, patient, or customer. The common kickback situation occurs when money or property is given to someone to influence a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment.
Example: The Yard Corporation is in the business of repairing ships. It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted.
No deductions are allowed for payments made to traffic drugs that are illegal under federal and/or state law. However, drug traffickers may take a deduction for the cost of goods sold.