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Small firms and startups may lose money because they don’t give enough weight to deductions for business expenses in their financial planning processes. Sure, you’re dedicated to satisfying your customers and developing better offerings. On the other hand, if you only take a few simple steps, you may drastically reduce your tax liability.
So, How to categorize expenses in a business? It is much easier to monitor and control deductible business expenses if it is broken down into easily identifiable categories.
According to the “AP in 2022: Expectations, Technology, and Opportunity” study by Stampli and Treasury Webinars, cash management was the most critical ability for AP teams to improve in 2022. In unpredictable economic times, businesses gain by rigorously monitoring their deductible expenses.
And thus, how to categorize expenses becomes the fundamental aspect of financial and cash management.
What are Business Expense Categories?
While there is no one source to compile all possible business costs your organization may be entitled to deduct, the following are some of the most universally applicable expense types.
- Vehicle Expenses
- Employee benefits
- Employee salaries
- Food & Meal Expenses
- Marketing & Advertising Expenses
- Office Supplies
- Dues and Subscription
- Legal and Professional fees
- Rent & Utilities
- Business Insurance
- Loan & Interest Payments
- Office Expenses
- Continuing education
- Shipping costs, etc.
This list could go on and on as every business and multiple business expenses per the nature of their operation and environment. Don’t worry if you find some expenses too difficult to track; you can always use the accounting software to manage them.
What is a Deductible Business Expense?
Learning how to classify business expenses includes getting a handle on what kind of costs may be written off.
Business expenses must be common and must be written off by the IRS.
For example, An automobile used in the course of your contracting firm, for instance, would fit the description of a commonplace and essential item. As a result, business expenses such as interest on the loan and repairs would be tax deductible.
However, the costs incurred for a private automobile would not be tax deductible.
A business expense is indeed not tax deductible if it is not one of the following or if it is not directly related to the operation of the company:
Parking tickets – Costs associated with infractions such as speeding, disobeying a traffic signal, or failing to yield.
Whatever you can think of that is unlawful – It ought to go without saying. Still, I’ll say it anyway: For instance, you cannot write off the money you spent bribing government officials or paying an arsonist to destroy your building to receive the insurance payout.
Money spent on amusement – Client entertainment expenses, such as concert or athletic event tickets, are not tax deductible.
Payouts for lobbying efforts – Lobbying expenditures are monetary resources private entities use to persuade public officials to adopt their policy positions. Anything from investing in billboard space to staffing up with lobbyists falls under this category.
Campaign contributions – Donations given to politicians, political parties, or election campaigns by people, groups, and businesses.
Transportation to and from work – Expenses incurred while commuting is not tax deductible.
Companion travel costs (unless employees) – Bringing a family member or close friend along on a work trip won’t save you money. Still, the money you spend on yourself will.
15 Common Business Expenses
We have already listed the common business expense categories in the above section of the blog. Still, now it’s time to review them in detail.
The various costs associated with car usage may pile up quickly. Thus business vehicles must be included on this list. It’s important to maintain tabs on how much you’re spending on the following:
- Inspecting and fixing
- Maintenance of gas and oil
- Altering Tires
- Expenses related to registering a vehicle
- Tolls, etc.
Remember that using the car for personal reasons might drive up the costs associated with it. That doesn’t imply the corporate automobile policy shouldn’t allow for personal usage; it just means you’ll have to work out how to allocate costs between the two categories.
Have you ever heard someone remark, “The perks at my company are amazing!” In this case, they are referring to their non-monetary benefits due to their employment. Companies provide these perks to entice and keep talented employees in their employ. Typical perks for employees include:
- Employee medical coverage
- Over Time Hours
- In-Home Child Care
- Leave Travel Concessions
- PF Contributions, etc.
Housing and domestic assistance programs are examples of the many employee benefit programs available. However, they often only apply to extremely big corporations.
Compensation paid to employees in salary, gross earnings, commissions, bonuses, and other forms is allowable business expenses.
The spouse and children of an employee are also entitled to compensation if they were paid via payroll and rendered services to the company. The cost should make sense, given the circumstances.
Food & Meal Expenses
Any meal — breakfast, lunch, or supper — may count if a business talk follows it, as can a trip to the local Starbucks.
Many businesses consider this business expense a revenue killer due to widespread misuse. Make sure you have a solid policy or an approved process for your employees to follow. Perhaps all that’s needed is a policy requiring prior approval for requests of this kind.
In the past, businesses could write off the expenses of hosting client events. Client entertainment costs, such as tickets to a concert or athletic event, might be considered an allowable business expenditure.
The deduction for entertainment costs was, however, removed by the Tax Cuts and Jobs Act of 2017. Meals are still deductible expenses, but entertainment expenses like those for sports events, concerts, and the like aren’t.
Suppose you have a lot of receipts for business meals and aren’t keeping track of them digitally. In that case, it’s a good idea to note the business purpose of each receipt, so you won’t forget why you spent money on it later. Then, save all of the receipts in the same location.
Marketing & Advertising Expenses
Spending on broadcast, print, online, outdoor, and direct mail counts as advertising costs.
Advertisements on websites, whether display or video, paid search, social media, email marketing, sponsored content, and retargeting, all fall under “digital advertising” and hence should be accounted for. The real ad production cost should also be included here.
Items like printer ink, pen, writing pads and postage are examples of business supplies. The cost of certain office furnishings may be partially deducted from your income, so be sure to include it.
Dues and Subscription
You may write off the business expense of your magazine and journal subscriptions if they are directly relevant to running your company. Membership dues to organizations like the local Chamber of Commerce and similar groups may be considered an investment in your firm’s success.
Even the membership fees in the business’s name can be considered a business expense.
Legal and Professional fees
Payments are made to experts in a certain industry engaged by your business to provide a service. Many businesses outsource some tasks because they lack in-house capabilities.
If you don’t already have an accountant on staff for whatever reason, but you’ll need one for a limited time or specific endeavour, you may hire one. Or you’ll have to contract a third-party firm to grow your digital presence. These business expenses would be recorded as “Professional Services Fees.”
Professional services include accounting, legal, technical, security, and marketing advice.
Rent & Utility
These might be things like the monthly lease payment or rental fee for your office space. It is always important to keep tabs on business costs, even whether you own the building your company operates out of or conduct business out of your own home. Include things like rent, mortgage, property taxes, and utilities.
With depreciation, you may write off the expense of company assets over time.
Regardless of how often or how much an item is used, its tax depreciation will always be determined by its categorization.
When filing your taxes, you may deduct the cost of common and required business insurance policies.
Everyday costs are those that are typical for your company and its industry. It’s reasonable and useful to deduct company expenses.
Loan & Interest Payments
In most cases, the interest paid on loans such as personal, auto, or credit card debt is not eligible to be deducted from taxes.
If, on the other hand, you use a loan or rack up credit card debt to support your company costs, you may be eligible to deduct the interest that you spent on that debt. Even the insurance premiums come under the categories.
Office expenditures are regular charges that a company incurs that are essential to operate the business, such as purchasing new computer equipment, fax machines, printers, and other items.
Additionally, deductibles are the business expense of accounting software and the bank fees associated with your company bank account.
Include in this category any funds spent on business-related continuing education for your industry, regardless of whether such education was necessary to retain certification.
Include the business expenses of the course in addition to those of the textbooks and other supplies. Include the workers’ costs in this area if you want to pay them for their out-of-pocket expenditures.
This total should include the cost of shipment, which may include the cost of postage or shipping with other carriers. Please be aware that the cost of envelopes and packing should not be included since they are considered office supplies. They will be classified differently but continue to be eligible for tax deductions.
3 Steps to Categorize Expenses for Your Small Business
Inconsistent cash flow and noncompliance with tax laws are among the top 10 financial difficulties facing small companies today. You may deviate from the norm by always using the same categories to classify costs. If you keep track of your business’s expenses this way, you’ll have a better idea of where your money is going and how much you can expect to owe in taxes come April.
Moreover, you will learn things that will help you draught a financial statement that will provide you more insight into things like profitability and cash flow. Both auditors and potential backers will need to see these documents.
Following these three guidelines, you may properly organize your company’s costs.
Identify the right business expense categories
Depending on your business, several types of categories may be more appropriate. Shipping and storage rental, for instance, might be separate categories for a greeting card company. At the same time, digital services could be different for a software-as-a-service (SaaS) provider.
A financial statement will assist you in determining which types of spending are most important to your company and will need to expand. Use the items above as a jumping-off point.
Maintain a regular schedule of account review and reconciliation
Reviewing financial records might help you keep track of your spending. Accounting software makes it simple to reconcile bank statements. A company credit card is a great tool for managing business expenses if you have trouble keeping track of your spending.
Assign Categories to the Expenses
Examine your receipts and allocate any tax-deductible items to the appropriate category on your list. Keep an eye out for any places that demand proof of purchase.
When assigning an expenditure, remember that it should be directly tied to the operation of your company. Otherwise, mixing business and personal funds might open you up to legal trouble.
Use Moon Invoice Expense Tracking Software to Track Spending and Categorize Business Expenses
Moon Invoice’s Invoicing software, which often contains especially large business categories, is a convenient tool for classifying and monitoring corporate expenditures.
The system is flexible enough to allow for last-minute changes, and it will assemble your financial dealings without any manual effort on your part.
In addition to keeping track of your expenditures, Our Software may provide useful reports detailing your business’s profit and loss.
Whether you break out your spending this way, you can see where your money is going and determine if you need to adjust your budget. Expenditure data may be broken down by period, allowing you to track price changes over time. These reports will help you keep track of your yearly company costs and make the deduction procedure much easier.