Exclusions From Business Tax Deductions Under the Law

Certain types of business expenses are categorically excluded from tax deductions, even though they are closely related to business operations. The two main categories of exclusions involve the costs of lobbying or influencing politics, as well as the costs of any fines or penalties assessed to a business for violating a law. These violations can range from minor, such as parking tickets assessed to business vehicles, to substantial, such as antitrust violations. If a business makes illegal payments, those also are excluded from deductions as a matter of public policy.

Lobbying expenses cover any payments that are made to support a political candidate or their campaign or to influence a legislative body in passing or rejecting legislation. They also cover the costs of attempts to influence the official actions or viewpoints of people in the executive branches of government. If a business launches an advertising campaign or otherwise tries to influence how people vote in referendums or elections, these costs also are not deductible. Recently, the Tax Cuts and Jobs Act eliminated an exception for lobbying expenses related to influencing legislation at the state, county, or city level. Costs related to lobbying at any level of government now are no longer eligible for a deduction.

Exclusions for Illegal Payments

Section 162 of the Internal Revenue Code sets out an exclusion from deductions for bribes, kickbacks, or other illegal payments. Bribes are excluded as long as they were paid to a government official in the U.S. If a business pays a bribe to an official of a foreign government, this is technically deductible if it does not violate the Foreign Corrupt Practices Act.

The idea behind kickbacks is that a business entity pays someone else to influence a third party to use the products or services of the business entity making the payment. It often arises in the healthcare industry, in which manufacturers of pharmaceuticals or medical devices have been known to pay kickbacks to healthcare providers to encourage patients to use their products. Kickbacks also can occur in industries involving heavy manufacturing. Most of the time, the third party is not aware of the kickback and believes that the entity receiving the kickback is providing the referral in good faith. Even if a kickback occurs often in an industry, it will not be deductible if it violates a generally enforceable law. This is true regardless of whether the business owners are actually prosecuted for breaking the law.

You cannot get a deduction for making payments related to trafficking in illegal drugs. These include drugs that are illegal under state law as well as federal law. Deductions may be permitted for the cost of goods sold by drug traffickers, such as cannabis-related businesses.

Last reviewed October 2024