Business Expenses: Everything You Need to Know

As a business owner, you should monitor your expenses since spending affects all aspects of your business. Whether you're an established entrepreneur or just starting, you must keep track of your spending if you want your business to thrive.

There are benefits beyond monetary savings to having a firm grasp of your company's expenditures. To aid in the growth and stability of your business, it enables you to make informed choices. Additionally, some of your spending may qualify as tax-deductible, so keeping careful records will help you pay less in taxes. 

Do you want to learn more about business expenses? Let's discuss it, along with suggestions for reducing unnecessary spending.

What are Business Expenses?

Business expenses are the costs incurred while conducting a business. These include an office lease, payroll, and other small business expenses. Whether a business incurs a net profit or a net loss depends on these expenses within a given period. Business expenses can be either fixed (those that stay constant) or variable (those that fluctuate).

The income statement is where you, as a responsible business owner, document all of your business-related expenses. Under the revenue section, include business expenses and deduct them to arrive at your net profit or loss.

What Expenses can be Deducted as Business Expenses?

The Internal Revenue Service (IRS) allows many business expenses to be tax-deductible if they are considered "ordinary and necessary. Ordinary expenses are common and accepted in your trade or business. Essential expenses are helpful and appropriate for your trade or business.

Not all expenses can be deducted from your taxes. Some only allow partial write-offs, while others must be capitalized. Capital expenditure means investing in assets such as buildings or equipment, which generate revenue but take time to age.

Capitalized expenses indicate only the depreciation amount in the income statement, unlike regular costs, which show the full amounts so that companies can evaluate profits accurately.

Business Expenses List:

Here are some common business expenses that may be deductible, either partially or fully:

• Payroll (employees and freelance help)
• Employee benefit programs
• Bank fees and interest
• Rent
• Software
• Utilities
• Insurance expenses
• Business vehicles
• Equipment or equipment rental
• Furniture
• Office Supplies
• Commissions & fees
• Employee retirement plans
• Employee education plans
• Advertising and marketing
• Business fees (licenses, permits, subscriptions, etc.)
• Mortgage payments
• Equipment maintenance and repair
• Legal fees
• Executive compensation

Some of your housing expenses can be partially deductible if you run a small business out of your home:

• Home office space (as long as this is your main place of business)
• Mortgage interest
• Security system
• Property taxes
• Maintenance, repairs, or upkeep
• Business phone line (separate from home line)
• Insurance

For example, assume that your home occupies 1,000 square feet overall, with 100 square feet dedicated to your home office. Then, you qualify for a home office deduction of 10% of the costs above. The other 90% will be part of your expenses.

Can Business Expenses Be Carried-Forward?

Business expenses are entirely deductible in the tax year they were incurred. But sometimes, if your company’s missed business expense significantly impacts its taxes, you can file an amended tax return within three years of the tax return due date.

Also, if certain business expenses are categorized as capitalized costs, they'll be carried over to future periods, but the depreciation amounts will change each year. Capitalizing expenses is common for new companies with high startup costs.

Income Statement Reporting

Your income statement is the primary financial document to record when keeping track of company spending and calculating taxable income. It shows your company's profits and expenditures for a specific period. People typically use various categories to break down the statement.

1. Cost of Goods Sold

A company's cost of goods sold (or cost of sales) is the money it spends on the products it sells, whether those products are made or bought. COGS are business expenses that impact a company's profit margin. 

• Factory overhead
• Storage
• Raw material and part prices, 
• Direct labor
• Shipping and freight, and 
• Indirect expenditures like sales force and distribution.

When a company deducts these expenses from its total revenue, it gives the gross profit.

2. Operating Costs

A company's operating costs include all the money spent daily running the company. There are three types of operational expenses: 

1. Fixed
2. Variable and 
3. Semi-variable

Operating profit is the profit remaining after subtracting operating expenses from gross profit. This includes executive compensation, marketing expenses, gifts and meals.

3. Depreciation

The term "depreciation" refers to spreading out the expense of an asset's purchase price over many years instead of just one. Depreciation primarily consists of two parts: the gradual decline in value that occurs with time and the distribution of the initial investment in an asset throughout its useful life. Businesses must follow GAAP, or Generally Accepted Accounting Principles, and employ standardized depreciation schedules for different types of assets. Amortization is a way to stretch out the expense of an intangible asset over a particular period, comparable to depreciation.

4. Interest Expenses

Deducting interest paid on loans from taxable income is interest expenses.

Tips to Cut Down Your Business Expenses

Though business expenses are unavoidable and needed for your business to grow, there are a few things to consider to cut down on unnecessary expenses:

1. First and foremost, you should separate your company spending from your spending. Not only should you keep your personal and company finances distinct, but you should also open a separate bank account specifically for your business. You cannot claim your expenses. Additionally, you can split and deduct the business portion of a cost if it’s used for company and personal purposes.
2. Creating and sticking to a yearly budget will help you avoid negative cash flow areas and only spend what you earn. When you're making your budget, include both fixed and variable spending.
3. The same applies to your spending. Keep track of everything you spend and save digital or paper receipts. If you can't get a receipt, keep a handwritten record of the date, the reason for the expense, the amount, and the seller.
4. Business owners must review their expenses regularly to keep track of their money. This enables them to find areas where they may cut operating costs to save money, identify tax breaks to minimize the company's tax bill and make better decisions about building their firm.

Track Your Business Expenses for Your Business Success

Keep your personal and business expenses apart for better management and verify which costs qualify for tax deductions. Thoughtful planning is required to maintain spending within your income.

Managing business expenses requires effort and time to record. Financial technology businesses can take care of everything so you can focus on expanding your company.