 Income tax 2022-2023. Expenses you cannot deduct. Let's do some wealth preservation with some tax preparation. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from the tax guide for small business for individuals who use Schedule C Publication 334 Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula focused online one remember in the first half of the income tax formula is in essence an income statement. Although just an outline of scaffolding other forms and schedules flowing into these line items. The schedule C having business income minus business expenses the net business income from the schedule C flowing into line one income of the income tax formula. Looking at the first page of the form 1040 noting the schedule C flows into the schedule one which flows into page one form 1040 line number eight. The schedule C is the profit or loss from business has an income statement format of income and expenses. We're focusing in on the expenses but this time we're not talking about what you can deduct but what you cannot deduct. So remember the general rule from the IRS perspective everything is basically income. Unless they say otherwise the income that you have you need to then determine whether what kind of income is it business income or some other kind of income. And then on the expense side of things when we're talking about business expenses. We follow a pretty natural kind of conceptual concept which is that the expenses that you can deduct are those that are ordinary and necessary in order to generate the revenue. Because when you have an income tax type of system it makes sense to tax people on the net income not on the gross income. So that's the general idea but you might have some things down here where you're saying hey look I have an ordinary and necessary business expense down here. It just happens to be an illegal one or something like that like a bribe which is quite common in other kinds of countries and possibly in the United States too. I don't really know but you would think if that's part of the way of business is done that you have to do that in order to get to do your business. But it's not legal right so you would think you could have restrictions against some types of expenses even though they might be ordinary or necessary possibly because they're not legal. Or because if they were to be allowed to be deductions they're going to further incentivize corruption like political corruption and that kind of stuff. So let's go into some of those items what can't you deduct then expenses you cannot deduct. You usually cannot deduct the following as business expenses for more information you can see publication 535 so bribes and kickbacks. Now this seems standard you would say well of course I don't do bribes and kickbacks in my business if you're working in a legitimate kind of place in the United States and you're running an honest business here. But in some kind of businesses especially in other countries bribes and kickbacks unfortunately is the political environment of the situation and some would argue that in some areas in the United States you have somewhat equivalent situations at times as well. So then you could argue although the ordinary and necessary kind of business expenses but no they're illegal so you can't deduct the bribes and kickbacks would be the general idea because they're not because they're bribes and kickbacks. So then you've got the charitable contributions. Now charitable contributions when you're talking about the Schedule C normally you might be able to deduct charitable contributions but usually you would think about them as possibly being deductible on the Schedule A. And only then if usually you are able to take the itemized deduction as opposed to the standard deduction would be the general kind of deductibility of charitable contributions usually so they're not really business expenses in other words. And again some people would argue you would say well I gave money from my sole proprietorship to the charity as part of my business concept or something like that or to look good and obviously businesses do that sometimes but it's not really a charitable contribution It sounds like you're basically paying for advertising or you're paying to look good. You're paying for that which is clearly businesses do that kind of thing but the charitable contributions usually you would think not business but possibly deductibles personal. That means that you might take the money out of the business and then give it to charity maybe and possibly get a deduction on the Schedule A itemized deductions. Demolition expenses or losses and dues to business social athletic luncheon sporting airline and hotel clubs. So these are kind of things that sound kind of like personal you know if you have if you're if you're giving money for dues for clubs and stuff like that. People have tried to set up these kind of clubs that look it off. It's one of those situations again where you could argue that it's business related but it seems kind of over the top. And that would be similar to when you're driving the fancy car and saying that you're just trying to do it for business purposes to get from A to B. But you could have got from A to B in a $30,000 car and you're driving a $200,000 car or something like that. So with the mingling situation you're like I got to build in my network because that's my business network and stuff. But your network seems to be a pretty personal social club you know at the golf course and stuff. So it seems like a little too much. You can see where this line always these lines become kind of confusing when you got the mixing of the personal and the business and then entertainment expenses. Same kind of concept here because the idea would be well I need to mingle from my social network. It's a business related thing that Bahama trip was a I went to was a smoozing with the with my clients. And so it's like yeah but you know you would think again that that really seems to kind of cross a fuzzy line between business and non business type of stuff. So then you got improvements to real or tangible personal property improvements are amounts paid for the betterment to your property restoration of your property or work that adopts your property to a new or different use. Now I think this is having to do with basically the idea that if you have your property and you repaired the property or something like that then it might be if it was if it was business property. Then you might be able to deduct it. But if you have improvements to the property then if they're still business related then you might have to put them on the books as an asset. Which means you if that were the case you would still possibly be able to get deduction but in the form of depreciation as opposed to an expense. Lobby and expenses. So you've got a similar kind of thing. You might think of lobbying expenses as as similar to like the bribes and kickback things except they're except they're kind of a legal type of bribing kickback type of situation but still clearly political kind of pandering kind of situation. And if you were if you were to allow the bribing to be expense that would further you know you would expect facilitate people to try to to try to do this political influencing things. So obviously one of the big problems we have or the scary things in any kind of capitalistic system. The capitalistic system usually works quite well until some of the players in the capitalistic system becomes so large that they that they they can influence the political sphere. And so then you have crony capitalism or the political sphere becomes so powerful that they're able to corrupt some of some of the businesses and then and then and now you've got a crony capitalism kind of situation. And that's what needs to be avoided in order to preserve to preserve actual capitalism. Which is usually going to be most beneficial for the consumer crony capitalism is going to be a way to limit competition favoring a smaller group at the expense of the consumer because they're going to have less productive outputs and costs more. So penalties and fines you pay to a government agency or instrumentally because you broke the law. So now you've got once again penalties. If you if you have the penalties as a result of you breaking the law the idea would be that they don't want to we don't want to incentivize the penalties for breaking the law even though it happened within a business kind of structure. And therefore could be thought of as ordinary and necessary except for the fact that they're you broke the law and we don't want to. So personal living and family expenses that one's a pretty clear cut one because those are clearly personal as opposed to business. So you would think that they would not be deductible on the purse on the business side. You would think they probably for the most part shouldn't be deductible anywhere because their personal living expenses and the income tax. You would think in general not just for the business but usually an income tax you would think would mean that the deductions you would get would be those that you needed to consume to generate revenue. And so we shouldn't be able you know you wouldn't normally be able to deduct personal things. But we note that there are many exceptions to that rule like the home mortgage interest you deduct for your personal home possibly on the schedule and property taxes and whatnot for personable stuff and that kind of stuff. But political contributions so same kind of thing here similar kind of argument with the lobbying why it would basically make sense because it's not illegal to give money to political contributions. You can do whatever you want support whoever you want but we're worried about the situation of the crony capitalism situation where they're basically just buying politicians. Or you know as part of the normal business practice which is of course going to lead to that that interplay between businesses and the politicians being colluded so you're going to try to stop that it's that is it working. I don't know if that's working but but I can see why you'd want to try to stop that from happening. So settlements or payments related to sexual harassment or sexual abuse is such settlements or payments is subject to a non disclosure agreement. So these kind of things as you know if you follow the news oftentimes happen a lot with these non disclosure kind of agreements that are related to sexual harassment claims and no one knows if the claims. You know half the time the claim might be legitimate or it might be just an illegitimate claim and they just basically come to this agreement and have a payoff kind of situation to not deal with it one way or the other and it's kind of a sad situation. But you know they don't want to incentivize those as well you would think so now so you also can't deduct attorney fees related to such settlements or payments. Okay.