Business expenses are the expenses or the costs incurred by a business for running all its operations. It is the money spent for the ordinary course of business. Business expenses are associated with small entities, large corporations as well as new startups. When you stay on top of your business expenses, it also helps you in reducing your overall tax liability.
Companies must track and categorize their business expenses be it the tax-deductible business expenses, marketing costs, business startup costs, variable expenses, entertainment expenses, and other types of ordinary and necessary costs. These expenses are the integral parts of the income statement, and they are subtracted from revenue to arrive at the taxable net income of the company.
What Are Business Expenses?
Definition: Business expenses are defined as the necessary and ordinary a business is supposed to incur for functioning. The Internal Revenue Service IRS defines ordinary as “one that is common and acceptable in your profession or company.”
A required or necessary cost is determined as “one that is essential and appropriate for your trade or business.” Businesses while making a profit can report their expenses for reducing their tax liability. Not all business costs are tax-deductible business expenses. Some types of business expenses may be fully deductible, while on the other hand, few expenses can be partially deductible or non-deductible.
Tax Deductible Business Expense Examples
Here are some examples of recurring company expenses that may be partially or entirely tax-deductible-
- Payroll processing (employees and freelance help)
- Bank commissions and interest
- Self-employment tax
- Home office expense
- Business mileage
- Vehicles provided by the company or equipment rented by the company Software Furniture Supplies
- Dues for membership (including union or other professional affiliations)
- Fees and Commissions
- Employee pension schemes
- Plans for employee education
- Employee assistance programs
- Rental of equipment
- Marketing and advertising expenses
- Legal expenses
- Repair and maintenance
If you run a small company from home, you may be able to deduct a few business expenses such as:
- Office area in the house (as long as this is your principal place of business)
- Mortgage loan interest
- Property taxes and security systems
- Upkeep, repairs, and maintenance
- Phone Line for Business (separate from the home line)
Examples of Non-Deductible Business Expenses
Some of the non-tax-deductible business expenses are-
- Demolition expenses or losses
- Government fines and penalties
- Political contributions
- Educational expenses incurred to meet requirements to conduct business
- Illegal activities
- Lobbying expenses, etc
Types of Expenses
Expenses are classified into types
It does not or very marginally varies. For example, consider the monthly rent paid by a company for its headquarters.
They change from month to month and are often the highest expense for a business. Payroll for a corporation with many freelance workers is an example of a variable payment, as are overtime costs.
These occur infrequently, hence planning for them can be an onerous task. Its example can be money spent for an unexpected machine repair or even replacement.
Business Expense Categories
This category includes the expense of things and services used to actively advertise or market your firm. Examples are fees spent on advertising or marketing firms to create promotional materials, billboards, brochures, posters, websites, and social media graphics. You can even deduct the cost of a public relations effort.
2. Continuing education
It can include classes for continuing education and seminars to keep up with industry developments. Tax-deductible materials, books, and registration costs for you and your workers. Payments provided to workers to repay them for applicable educational expenditures can also be deducted.
3. Credit and collection fees
Companies that utilize accrual accounting, which records income and costs generated or spent even if no money crosses hands, can deduct outstanding bills as bad corporate debt. Any expenses incurred in collecting on an obligation include hiring a third party to collect what is owed.
4. Bank fees
Interest on business loans, continuing credit lines, and company credit cards are deductible. Bank expenses, such as monthly maintenance or overdraft charges, are also considered.
5. Dues and subscriptions
You can deduct subscriptions to industry magazines or journals linked to your business on your taxes. Membership fees can include those paid to professional or trade organizations that can assist market your firm, as well as those born to your local Chamber of Commerce.
6. Employee benefit programs
Tax deductions apply to payments paid for benefits such as disability insurance, life insurance, dependent care assistance, health plans for you and your employees, and adoption help. It’s worth noting that, like workers’ compensation insurance, this is one area where businesses tend to pay more than they need to.
In addition to workers’ compensation insurance, payments for business-related insurance, such as liability, malpractice, and real estate, can be deducted.
8. Maintenance and repairs
Businesses that employ fleet cars can deduct the fraction used for commercial purposes. Parking fees and gas are deductible costs. Alternatively, you can use the regular mileage rate. Repair and maintenance of different types of equipment and machinery employed in your organization might also be considered.
Actual car expenditures may include petrol, oil, maintenance, tires, insurance, registration fees, licenses, and depreciation (or lease payments) prorated to total business miles traveled. Legal and professional expenditures include fees paid to certified public accountants (CPAs), financial advisors, attorneys, and other professionals.
Cleaning products, paper, notes, stationery, and even food and beverages for staff can be deducted as office costs and supplies. Expenses include fees associated with running a business, such as website hosting and software.
Monthly telecommunications bills in business premises and supplementary phone lines in a home office and cell phone contracts as a subcategory of office expenditures can be deducted.
Utilities such as power, internet, sewerage, and garbage pickup are deductible for a commercial location. You can deduct utilities for a home office in proportion to how much your house is utilized for business.
11. Stamps, freight, and postage Expenses
Postage and shipping expenses are used to mail business-related items, such as customers’ merchandise and return shipping labels. Office supplies include envelopes and packing materials.
It includes business expenses associated with different printing items like ink cartridges or printers, or payments for printing services.
Business expenses related to rental payments done for occupying a warehouse for inventory or office space for conducting business.
14. Salaries and other compensation
It covers business expenses associated with employee salaries, commissions, gross wages, bonuses sorts of compensation. These are considered tax-deductible expenses.
15. Mortgage interest
Businesses involved in taking out a loan for business purposes are also supposed to make business expenses in the form of mortgage interest.
In addition to these, some of the other categories of business expenses are Travel, Business meals, Business use of your car, Moving expenses, Depreciation, Charitable contributions, Child and/or dependent care, Startup expenses, Software, Books and magazine subscriptions, Foreign earned income, Medical expenses, Licenses and permits, Manufacturing or raw materials, Real estate taxes, Client gifts, etc.
Can Business Expenses Be Reimbursed?
Financial costs incurred by a business must typically be disclosed in the tax year in which the purchases were made. If the missing expenses were significant and impacted a firm’s taxes, the corporation might choose to file an amended tax return. This must be completed within three years.
Furthermore, expenses considered to be capitalized costs will be carried forward, although the depreciation levels will alter each year; this is typical for a startup firm with significant initial expenditures.
Personal Expenses for Business: Can I Deduct Them?
No, personal costs for a business cannot be deducted. The sole exception is if the spending is used for personal and commercial purposes. In that situation, the business portion might be removed.
Let’s look at an example. Consider John, who is self-employed and owns his tax consulting firm. He uses his automobile 50 percent of the time to visit customers at their homes or places of work, and the other 50 percent for family or pleasure.
He uses his automobile 50 percent of the time to visit customers at their homes or places of work, and the other 50 percent for family or pleasure. The regulations enable John to deduct the business portion; but, to support this claim on his taxes, he must document miles and the purpose of each trip and track gas, insurance, maintenance, and repairs.
Steps to Classify Business Expenses
By classifying your expenses consistently, you can resolve different financial challenges. This will help you understand where and how much you’re spending to run your business while preparing for tax season.
It will also help you get insights that will allow you to construct a financial statement that will provide visibility into cash flow and profitability. Such documents are essential for audits and are frequently sought by investors.
The following are three processes for categorizing or classifying your business expenses-
- You need to find out the appropriate categories for your particular firm. Choosing the proper types will be determined by your industry. A greeting card company, for example, may have specific categories for shipping and storage rental, whereas software-as-a-service (SaaS) enterprises may have dedicated classes for digital services. Begin by selecting the spending categories your company relies on the most—this will be the basis for your financial statement.
- Your accounts must be reconciled and reviewed regularly. Examining your bank accounts is an excellent practice that will inspire you to keep track of your expenses. Accounting software makes reconciling bank accounts simple. If you’re experiencing difficulties, a business-only credit card is top cost management best practice.
- All transactions should be assigned a category. Examine your expenditure details using the list of categories you created and allocate everything deductible. Pay close attention to the areas where receipts are necessary. Keep in mind that keeping your business and personal funds separate is a piece of top financial advice for small companies since it protects you from responsibility, so when you allocate an item, be sure it’s business-related.
How to Track Business Expenses?
It is important that you become habitual in tracking your business expenses because when you make it an integral part of your regular workflow, there will be lesser chances of missing those expenses that can reduce your overall burden of taxable income on your business income.
It will let you do better monitoring of the financial health of your company. Some of the key steps you need to follow these steps-
- Opening a business bank account
- Formalizing the process of storing receipts
- Reviewing and categorizing your expenses regularly
- Considering a buying business accounting software
In addition to these, the below-given tips will also help you in effectively managing your business expenses-
Business Expense Tips
Some of the easy hacks to optimize the management of business expenses are-
- Keeping meticulous records of business expense
- Separating your personal and business expenses
- Brushing up on what expenses can be considered tax-deductible
- Saving receipts of your business travel expenses
- Recording your expenses ASAP
- Monitoring and reviewing your expenses on a regular basis
Create and revise an annual budget to prevent overspending and going into hostile cash flow areas. When creating a budget, consider both fixed and variable spending.
You’ve probably heard it once, twice, or many times: maintaining thorough records is essential in business. The same is true for your expenditures. Keep track of everything you spend and save all receipts, whether digital or paper. If you cannot obtain a permit, keep a handwritten record that includes the date, reason for the spending, amount, and vendor.
A business owner while managing business expenses should use accounting software to track spending and categorize expenses effectively. Software like NetSuite Cloud Accounting Software will help you in improving your financial controls, closing faster, and producing accurate reports.
What kinds of business expenses do you make on a regular basis? Share your deductible and non-deductible expenses in the comment section below.