Some costs a business pays cannot be deducted against its income, or only partly can, and a record that does not distinguish them makes the accountant sort the year by hand. This page is for the small business owner who wants to record nondeductible expenses honestly: the kinds of cost that commonly fall on that side of the line, why the record keeps them in full anyway, and how to mark them so the year-end handover is a summary. It describes categories, not a taxpayer's position; whether a specific expense is deductible for a specific business is the accountant's call, and this hub states the published rules and stops. The expense report template on this site carries a per-line flag for the purpose.
The common kinds
Fines and penalties. Political contributions and lobbying. Personal expenses paid through the business. Entertainment, which is generally not deductible, as distinct from business meals. The half of business meals above the limit: 26 U.S.C. 274(n) limits the deduction for food and beverages to 50 percent of the amount spent, so the other half is nondeductible by construction. Commuting. Club dues. Gifts above the per-person limit. Each is a real business cost; none of them reduces the tax bill in full.
Why the record keeps them in full
The business still paid the money, and the owner still needs to see where it went. A record that drops nondeductible costs understates what the business spends; a record that mixes them with deductible costs overstates the deduction the accountant can take. Both are wrong. Record every cost in full in its category, and mark the ones that are not deductible so they can be separated in a moment.
Marking them
A flag per line, or a category naming convention, or a separate column: any of the three works if it is used every time. Meals get their own category regardless, because the half-deductible rule applies to the whole line. Entertainment gets its own category because it is treated differently again. The expense report template on this site carries the flag per line; the spreadsheet carries meals and entertainment as their own categories.
Reimbursed nondeductible costs
An employee's claim for a client dinner or a parking fine is still paid back if the policy allows it; reimbursement and deductibility are separate questions. The policy, drafted with the expense policy builder here, says what the business will pay back; the record then marks what the business paid back that it cannot deduct.
What the accountant decides
Whether a particular cost is deductible for this business in this year, whether an exception to the meals limit applies, and how the return presents it. The record's job is to make those decisions quick by showing the cost, the category and the flag. PerDiemDesk Pro, at $4 per month for the whole team, keeps every claim against its category with the flag.
Questions people ask about nondeductible expenses
Are business meals nondeductible expenses?
Half deductible under 26 U.S.C. 274(n), with exceptions the accountant applies. Record them in their own category in full.
Should I stop recording nondeductible expenses?
No. Record them in full and mark them; the business still spent the money and the accountant needs to see it separated.
Is a parking fine incurred on a work trip deductible?
Fines and penalties are generally not deductible. Whether the business reimburses it is a policy question; whether it deducts it is the accountant's.