What Are Business Expenses?
To successfully manage the finances of your company, you need to be clear about what is being spent and where it is being spent. That means tracking your business expenses, which are any costs incurred in the ordinary course of business. Every business, whether a Fortune 500 or a mom-and-pop shop, tracks its expenses throughout the year for multiple reasons. These include tax filings, determining the profitability of the business, and determining the budget for the company.
These expenses are subtracted from your revenue to arrive at your company’s taxable net income. That is why you might see people refer to business expenses as deductions. With that in mind, let’s dive into the different types of business expenses that your company.
What Are the Types of Business Expenses?
Business expenses can cover a variety of expenditures. Although the IRS allows businesses to report any expenses that may be ordinary or necessary, that doesn’t mean your company’s expenses will always fall into these categories. Generally, if an expense is considered ordinary, then it is common to your industry, and many business owners would also expense these items. Necessary expenses are appropriate because if those expenditures are not made, then your business might not be able to function.
To be clear, some business expenses are fully tax deductible, and others are only partially deductible. Here are a few fully deductible expenses:
- Advertising and marketing expenses
- Credit card processing fees
- License and regulatory fees
- Wages paid to contract employees
- Equipment rentals
- Insurance costs
- Office expenses and supplies
- Utilities
- Office lease costs
Most of the time, business expenses can be broken down into three basic categories: direct, indirect, and interest. There are also three types of business expenses: fixed, variable, and periodic, which can be found in each of the categories.
What Are Examples of Business Expenses?
Here are just a few different examples of business expenses that you might encounter as you run your business.
Location costs – These are expenses related to securing a location for your company. This might include mortgage payments if you purchased a commercial property or rent/lease payments, which might stay the same for years, depending upon the terms of your lease.
Utilities – The lights, heat, and water for your business all fall under this category. Since these costs can vary depending on the season or month, you often must estimate them within your budget and then replace that number with your actual spending as each month’s bill comes in.
Telephone/Internet – Since connection is key to building your business and reaching customers, today’s companies depend on Internet and telephone connectivity. These plans are typically at a fixed cost and can include cell phones.
Office equipment – These expenses can include computers, printers, office furniture, and office supplies. If you need specialized equipment for your office, such as a 3-D printer, then that could also be included in this category.
Employee salaries and benefits – Your company covers payroll costs and benefits, including vacation and personal time, for your employees. If your company utilizes freelance or contract workers, then you can also include those costs under this business expense.
What Are Tax-Deductible Business Expenses?
Tax-deductible expenses are ordinary and necessary for running your business. The IRS outlines a list of expenses that are deductible, but even if an expense is deductible, there are rules regarding what can be deducted and how to figure out the amount you can deduct.
Working with your bookkeeper and accountant can assist you in this process. Your bookkeeper can make sure that all business expenses are categorized and recorded, and then your accountant can use that information to determine what is deductible and what is not.
Note that your business may have various expenses that are important to maintaining your manufacturing or sales team, but not all of those might be considered fully deductible or must be deducted across multiple years as their value depreciates.
What Are Non-Deductible Business Expenses?
Expenses are usually broken into three different areas: tax-deductible, non-deductible, and context-specific deductions. To determine if an expense is non-deductible, first determine whether it is for the business or a personal expense. If you go out to lunch with friends, for instance, and fill your gas tank on the way to lunch, then both the lunch and the gas are personal expenses and non-deductible.
Other costs that are typically non-deductible include:
- Political contributions
- Commuting expenses
- Certain gifts (only gifts up to $25 are deductible)
- Travel expenses for extra travelers
For example, if you are taking a business trip, and your family comes along because you are also taking a vacation in the same location, then all the expenses related to your family’s travel would be considered personal expenses and non-deductible.
However, you might be wondering what makes an expense personal versus business. Let’s dive into that next.
What’s The Difference Between Personal vs. Business Expenses?
The difference between personal and business expenses is that personal expenses benefit you as an individual but are not linked to your business. This also means that personal expenses cannot be deducted, so they will not reduce your taxable income.
How Do I Track Business Expenses?
Typically, your business will utilize accounting software, which is available online or as a one-time purchase to be loaded on your desktop. This software allows your bookkeeper and accountant to track and review your expenses, making sure that everything is categorized properly. During this process, your bookkeeper confirms that all listed expenses are business and not personal, thereby helping your accountant to determine what is deductible.
What Are the Benefits of Tracking Business Expenses?
There are several benefits to tracking your business expenses, such as:
- Up-to-date financials
- Creating and managing your budget
- Identify and eliminate wasteful spending
- Prepare for tax season
- Helps to control cash flow
- Maintain focus on financial goals for your company
- Prevents overspending
Clearly, there are plenty of benefits to tracking your business expenses. With all the receipts and invoices, you might be overwhelmed by the idea of trying to get everything organized and inputted into your accounting software. Let’s dive into a few tips to make this process easier.
Tips for Organizing Business Expenses
Make sure that you have categories set up in your accounting software for all your various expenses. These categories can help you to budget but also identify areas where improvement in spending might be necessary. Yoru bookkeeper can assist you in creating categories, but also making sure that all expenses are coded to the right categories.
Your accounting software can also assist you in creating rules for certain expenses, thus allowing them to be categorized automatically. Here are a few other key ways to organize business expenses:
- Open a dedicated business bank account.
- Record transactions.
- Categorize them as one-time or recurring expenses.
- Choose a cash basis or accrual accounting method.
- Digitalize receipts and records.
- Connect your bank with your accounting software.
- Protect your personal liability with either an LLC or an S Corporation.
To run your business efficiently, working with a bookkeeper can help keep your expenses organized and categorized correctly, allowing you to make critical financial decisions with accurate information.
Frequently Asked Questions
What Can You Write off as Business Expenses?
Business expenses are costs that are “ordinary” and “necessary” for running your business. Some of these expenses that can be written off include:
- Car expenses and mileage
- Office expenses, including rent and utilities
- Business phone bills and internet
- Equipment rentals
- Employee benefits
- Accounting and advertising fees
- Business meals (although these are only 50% deductible)
Can Business Expenses Be Carried Forward?
Business expenses that are considered capitalized costs can be carried forward, but the depreciation amounts will change every year. Net operating losses can be carried forward indefinitely, but they are limited to 80% of the taxable income within the year the carryforward is used. When your company experiences significant losses in the current year, you can use the carry-forward to offset future profits with this tax deduction.
Can I Deduct Personal Expenses for Business?
No, personal expenses cannot be deducted from your business.
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
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In Summary
Having your business expenses in order is key to maximizing your company’s tax benefits. To make sure you are receiving all your deductions, it is critical that you have procedures in place to make sure they are recorded and categorized correctly. Doing so provides multiple benefits for owners as they work to maintain and expand their businesses effectively.
