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How to Classify Business Expenses?

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Do you ever wonder where your business’s profits went? Tracking your business expenses allows you to identify how your money is spent and make smarter business decisions.

It can also assist you in determining the company deductions you can claim when Filing your Taxes. As a small business owner, you want to take advantage of every available tax deduction in order to reduce your tax payment and increase cash flow. 

Tracking and classifying deductible costs properly allows you to keep accurate records for yourself or your accountant, making tax season a breeze.

If you need help figuring out where to begin, this article discusses several common business spending categories, how to determine whether an expense is deductible, and some monitoring techniques.

every business owner requires a list of business expenses

Creating company expense categories lets you understand which expenses you may and cannot deduct. Additionally, if a bookkeeper or tax preparer handles your taxes, categorizing your expenses with a chart of accounts saves time and money on income tax preparation.

The types of costs you can deduct depend on your industry and whether you work from a commercial office or from home. However, below is a list of some of the most typical business tax deductions.

  • Rent: Any business location you rent may be tax-deductible. This includes a physical store space, an office building, a warehouse, or a piece of your home.
  • Salaries: Classify all salaries you pay, whether they are hourly or annual. Include incentives, commissions, and any money paid to children or spouses to assist you with business.
  • Advertising: Include any advertising expenses incurred by your company. This could include things like business cards, pamphlets, and social media advertising. It also includes funds spent on marketing services to assist in advertising your company.
  • Start-up Expenses: You can deduct up to $5,000 in business start-up expenses, such as legal and filing fees and market research.
  • Depreciation: If you have significant assets with more than one year of  life, you can deduct a portion of the business asset’s expense over a defined number of years.

read more: achieving financial success in 2024 

  • Employee Benefits and Insurance: This area includes any benefits you provide to your employees, such as workers’ compensation, health insurance, and retirement programs.
  • Commercial Insurance: Maintain a record of your insurance premiums to protect your firm, such as commercial liability insurance and workers’ compensation.
  • Permits or Licenses: You can deduct the expense of acquiring certification for yourself and your workers if your firm requires particular licensing or permits to operate.

read more: how to apply for a business license

  • Ongoing Education: This category should include any money spent on business-related continuing education (whether required to retain certification or not). Include all textbooks, materials, and course fees. Include the charges in this area if you reimburse staff for their expenses.
  • Office Supplies and Expenses: Include any costs associated with running your office, such as internet hosting and software required to run your firm. Include the cost of everyday office supplies like paper, pens, sticky notes, and other office supplies.
  • Upkeep and Repairs: Keep note of any maintenance and repair costs for cars, equipment, or the facility itself.
  • Using a Vehicle: If you use your personal vehicle for business reasons or have a car only for business purposes, you can deduct the cost of ownership and maintenance. Most taxpayers use the standard mileage rate to calculate their deductions, but if you keep solid records, you can also use your actual expenses.
  • Professional Charges: Any legal counsel or advice an accountant or advisor provides may be tax deductible. This includes any fees you may have paid to a lawyer, financial counselor, or tax preparer.

read more: the 14 must have startup tools in 2024

  • Utilities and Phone Bills: Any expenses you incur to keep your business running may be tax deductible. This includes electric, gas, water, garbage collection, and phone costs. If you conduct your business from home, you can deduct only the portion of these costs related to using the office, not the entire house.
  • Subscriptions and Dues: Subscriptions and dues paid to manage your business may be deductible. This covers magazine and trade subscriptions, as well as trade association membership costs.
  • Business Meals and Travel: Keep track of any business travel you or your staff take because it is tax deductible. The entire journey must be for business purposes. If not, you must only deduct the portion of the trip used solely for business purposes. Additionally, you can deduct 50% of the expense of business meals when traveling.
  • Shipping Charges: Include the shipping cost here, such as postage or shipping with other carriers. You should not include the cost of envelopes and packing because they are considered office supplies. They will still be tax-deductible but in a separate category.
  • The Cost of the Loan’s Interest: Any interest paid on loans solely for commercial purposes may be deducted. Interest on business loans, credit cards, credit lines, and mortgages are all included. Bank fees and expenses, such as monthly maintenance or miscellaneous bank fees, may also be deducted. Information on company expenses and how to deduct them can be found in IRS Publication 535.

How Can You Know Whether Something is Deductible?

Deductible expenses are those that are necessary for the operation of your business. The IRS requires that it must be “ordinary and required.”

If an expense is not required to run the business or falls into one of the following categories, it is not tax deductible:

  • Lobbying Costs: Groups or individuals spend funds in an attempt to influence government officials’ decision-making. This might range from purchasing advertising space to paying experienced lobbyists.
  • Political Contributions: Individuals, organizations, or companies make monetary or other valuable contributions to politicians, political parties, or political campaigns.
  • Traffic Citations: Fines for speeding, running a red light, failing to yield, etc.
  • Work-Related Attire: Work uniforms are an exception to this regulation as long as they are not worn daily.
  • Traveling To and From Work:Commuting is seen as a personal expense.
  • Entertainment Costs: Taking clients to concerts, sporting events, or other forms of entertainment is not deductible.
  • Business Presents are Worth More than $25: This restriction applies per individual for any direct or indirect business donations made during the tax year.
  • Companion Travel Expenses (Unless Workers): Bringing your spouse, child, or friend on a work vacation is not deductible, but your expenses are.
  • Anything that is Illegal: This should go without saying, yet it is worth emphasizing. You cannot, for example, deduct bribes paid to government officials or the expense of employing an arsonist to burn down your building in order to collect insurance money.

how do you keep track of your company’s expenses?

Keeping track of business expenses can take time and effort, especially with the number of spending categories available on tax forms.
However, with a little planning and work, you can swiftly and efficiently categorize your business spending. Here is how.

establish a separate company bank account
Combine your company and personal accounts. Open a separate business bank account and use it just for business transactions. Not only does keeping business and personal assets separate make it easier to track down tax-deductible business spending, but it also limits your personal liabilities.

make use of a company credit card
Avoid using your personal credit card for business expenses because it can be difficult to distinguish between the two, especially if you wait until tax Season.
Maintain a separate company credit card to track spending and ensure you deduct all permitted business expenses. You may access your credit card statements and run reports to guarantee you’ve captured all of them.

maintain digital copies of receipts
Make scanning your receipts after each purchase a habit. The records should then be saved on your computer or in the cloud for safekeeping. If you don’t have to sift through a shoebox full of receipts, it’s much easier to reference your costs during tax season.

use accounting software (or hire a bookkeeper)
Using accounting software that connects to your bank account for automated importation ensures that no transactions are missed and your expenses are appropriately classified. 

Of course, you should carefully examine the transactions to ensure they’re in the correct category, but reconciling using this method takes far less time than manually inputting every transaction.

read more: how to choose the right bookkeeping software for your business

If you don’t have enough time to do your own bookkeeping or it seems too difficult, you can outsource it to an online bookkeeping service such as Countick

We use proprietary software and a dedicated bookkeeping team to import bank data, compile financial transactions, and prepare financial statements. If you require it, we can even prepare your tax return. It’s the ideal method to be in your zone of genius while also working on building your business.

Using every tax-deductible item will enhance your company’s cash flow and make it easier to run. The most accessible approach to ensuring you get every eligible deduction is to automate your cost reconciliation. Countick expert’s assistance can help you start categorizing and tracking your company’s spending.

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