Every time you purchase new office supplies, pay rent or pay for an ad, you are covering business expenses. Basically, business expenses are the cost that your startup business incurs to generate sales.
Through organizing diverse costs into distinct business expense categories, you can create budgets, file taxes, and maintain accurate records. You may also be able to claim the tax savings available for your company. Some business expenses are tax-deductible, where small business owners can claim vital funds when tax time rolls around. Having clear expense categories and good records will help you identify chances to save and more.
What Are Examples of Business Expenses?
Small businesses can write off their deductible business expenses to reduce the amount they owe on their income tax. Some of these expenses are:
1. Business Meals
For meal or food expenses, you are able to deduct 50 percent of food and drink purchases that qualify. But the meal needs to be related to your small business, and the following should be noted:
- Date and location of the meal
- A business relationship of the person or people you dined with
- The total cost of the meal
Keeping your receipt and noting down your meal’s details will make it easier to track your business expenses on meals.
2. Work-related Travel Fees
All business expenses related to your business and personal travel, from airfare to hotels, rental car expenses, dry cleaning, tips, meals, and more. The trip must be necessary for a business or take you away from a tax home, city, or area where your company conducts its business.
3. Work-related Car Use
Using your car strictly for work-related purposes, you can deduct expenses or write off all costs associated with operating and maintaining. If your car use is mixed between personal and business, you can deduct the cost related to vehicles for business use. You can declare the mileage you used for business driving by deducting the actual miles traveled for business.
4. Business Insurance
You can use a part of your home to operate your business. Using it as your home office, you can take advantage of this and subtract your renter’s insurance costs as part of your home office deduction.
5. Home Office Expenses
Home-based small businesses and freelancers can subtract five dollars per square foot of your home used for business purposes under new simplified IRS guidelines. Note that your work area must be regularly and exclusively used for business only.
6. Office Supply
Office supply expenses include printers, papers, computers, pens, and work-related software used for business purposes within the year they were purchased.
7. Phone And Internet Expenses
Phone and internet expenses can be deducted, as they are vital to running the business. You may write off the percentage that goes to your business use.
8. Business Interest and Bank Fees
Borrowing money to fund your business activities, the bank will charge you interest on your business loan. You can deduct the interest charged both on business loans and credit card.
You can deduct the cost of a big-ticket item like cars or machinery over the lifetime of the item, instead of deducting all in one go for a single tax year.
10. Professional Service Fees
You can write off any professional service fees essential to the business’s operation, such as legal, accounting, and bookkeeping services. Softwares used for accounting and bookkeeping for business are also tax-deductible.
11. Salaries and Benefits
You can write off your employees’ salaries, benefits, and vacation pay on your tax returns. Although there are certain requirements that you have to meet.
The employee is not a sole proprietor, partner, or LLC member.
The salary is necessary and reasonable.
The services offered to the employees were provided.
12. Charitable Contributions
You can deduct charitable donations that you make to qualified organizations.
You can write off educational expenses that bring value to your personal and business state. The required details of the education expenses related may include courses or workshops to improve skills and maintain professional expertise.
14. Child and Dependent Care
Costs in caring for children or adult dependents are qualified for a tax deduction. Your dependents can be your husband, children of ages 12 years old and younger, or any other related adults who cannot take care of themselves due to physical disability or mental illness.
15. Energy Efficiency Expenses
Upgrades that you make to ensure a more energy-efficient home. You can claim 30 percent of the cost of alternative energy devices for your homes, such as solar panels, solar water heaters, and wind turbines.
What Can You Write Off as Business Expenses?
Business expenses that you can write off for deductions are the ones that are considered by the IRS to be both “ordinary and necessary.”
Ordinary is defined by the IRS as common and accepted in your trade or business, while a necessary is one that is helpful and appropriate for your business.
Not all expenses are tax-deductible. If there are some, they may only qualify for a partial reduction. Some companies will need to capitalize on expenses wherein a business invests in to generate revenue. Capitalizing large expenses means the depreciation amount of those items will show up on a company’s income statement for that year only. This will allow the company to compute and assess its profits.
Small businesses, entrepreneurs, and freelancers can write off a series of deductible business expenses when filing their income tax.
- Car expenses and mileage
- Office equipment, like computers, software, etc.
- Office expenses, such as rent, utilities, etc.
- Health insurance premiums
- Education courses
- Business phone bills
- Parking for business-related trips
- Business-related travel fees, like flights, hotels, rental cars, etc.
How Do You List Business Expenses On Taxes?
The type of business expenses a startup may incur varies. In writing, an expenditure on your income tax return has to meet specific IRS requirements. According to the IRS, business expenses that are ordinary and necessary are tax-deductible.
While an ordinary expense is common and accepted in the industry, a necessary expense is helpful and appropriate for your industry and business. A necessary expense does not have to be indispensable. Common expenses for startups are travel costs, internet bills, state taxes, consulting fees, and employee wages. These expenses are fully deductible, and others can be computed using special formulas or percentages.
List of Business Expense Categories For Startups
Many startup owners list their business expense categories with small business tax deductions that they are planning to claim. Your categories must matter to you or your accountant. There are various sets of business expense categories that startup founders will likely to use.
Rent of Mortgage Payments
If you are renting or owning an office space or another location, record it in a separate category. The interest in your mortgage or rent payments are likely deductible.
Home Office Costs
Those businesses that operate at the home office also qualify for deductions. You can use home office deductions by writing costs like rent, utilities, repairs, and mortgage interest. Considering it as a strict rule to what qualifies as a home office, you have to ensure you suffice the requirements.
This includes monthly costs like electricity, water, gas, air conditioning, and trash. If you rent or lease your business space, utility costs may be built around your rent. Take note to include the cost of cellphones and the internet.
Furniture, Equipment, and Machinery
A legitimate business purchase that can last longer than a year can be considered an asset instead of an expense. It includes things like laptops, desks, machinery, and point-of-sale systems. Deductions for business assets vary. You can deduct the asset’s cost in the first year you bought it or deducted the depreciation cost. You can consult a tax professional to ensure your bookkeeping is correct.
Office expenses are common categories. Record your spending on pens, folders, trash bags, disinfectant wipes, and other cleaning supplies to make sure no purchases slip through the cracks.
Advertising and Marketing
These are the costs of promoting your brand, including pay-per-click ads, billboards, giveaways, and business cards. If you are paying for graphic design for a website, you can include it or under professional fees as you pay for a graphic designer.
Website and software expenses
Include fees for your domain name, web hosting, maintenance, and more. Remember to capture your software as service spending (SaaS).
You cannot deduct business entertainment expenses, but you should track entertainment spending closely. Tickets to sporting events, networking, and galas fall under this category.
Business Meals and Travel Expenses
The IRS pays attention to these categories. If you want a deduction on meal and travel expenses, you have to keep accurate and detailed records and receipts. Remember that business travel includes traveling outside the city, vehicle costs, accommodations, airfare, and meals.
Record your gas, oil, insurance, and repair & maintenance expenses. There are two ways to deduct the cost of your vehicle for business purpose. You may use the standard mileage rate option or the actual expense option. If you purchase a vehicle and want to minus the depreciation costs, you should drive the vehicle for business purposes at least 50% of the time.
This includes the salaries, bonuses, or commissions you pay to workers, whether full-time or contractual. Put payroll taxes in a separate category for additional financial clarity.
If you offer health insurance, list the insurance premiums you cover. Record any contributions toward retirement plans like 401(k) plans or if there are any other funds. As a business owner, you may have self-employed insurance costs.
Tracking taxes separately will help correct your money allocation. You can list business property taxes, small business, state, federal, and local payroll taxes, particularly Social Security and Medicare tax.
Payments on business liability insurance, worker’s compensation insurance, disability insurance, and more should be recorded.
Business Licenses and Permits
This includes the costs associated with occupational licenses, health permits, and other required documents, like certifications for your industry.
Interest Payments and Bank Fees
You will pay interest on any loan funds or ongoing credit lines, such as corporate a credit card. Record any fees that you may run into, such as bank fees, minimum balance fees, or overdraft fees.
If you are part of a trade association or local chamber of commerce, you may use this category to monitor and write off dues. Remember that there is no deduction in registration fees for social clubs.
Professional Fees and Business Services
Record your payment for professional services. When working with a marketing agency, certified public accountant (CPA) or tax advisor, legal advisor, you may be able to use this category.
Training and Education
Business owners are entitled to business tax deductions to enhance the members’ skills and keep them updated with the latest industry practices. Record and write off any employee training costs, workshops, conferences, and other knowledge and skill development opportunities.