Business Expenses That Are Never Deductible

Some types of expenses are directly related to operating a business, but aren't 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 expenses or political contributions
• fines and penalties, and
• illegal payments.

Lobbying Expenses or Political Contributions

Lobbying expenses or political contributions aren't deductible. Businesses used to be able deduct up to $2,000 per year to influence local legislation (not including hiring professional lobbyists), but the Tax Cuts and Jobs Act eliminated this deduction for 2018 and later.

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)).

Illegal Payments

For obvious reasons, illegal payments are never deductible. (IRC § 162(c)). These include:

Bribes

Bribes paid to government officials located in the United States aren't deductible. However, bribes paid to foreign government employees are disallowed only if they violate the Foreign Corrupt Practices Act.

Kickbacks

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 isn't 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 aren't deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted.

Drug Trafficking

No deductions are allowed for payments made to traffic drugs that are illegal under federal and/or state law.

Get More Information

For more information on business expenses that are never deductible and other tax issues for small businesses, get Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).

If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.