Business Expenses List w/ Examples – What are they and Which ones can you Write-off & Deduct?
When operating a business, you would not be able to run away from expenditures that you will inevitably come across.
It does not have to be a bad thing to have business expenses; in fact, business expenses can be used to reduce your company’s tax liability.
The key to paying only what you need to pay in taxes instead of paying more than you need to is in knowing exactly what business expenses to deduct.
Now you are probably wondering what business expenses are, so keep on reading to know how to utilize legitimate business expenses to minimize the taxes you have to pay and thus maximize the profits of your business.
What is a Business Expense?
Simply put, a business expense is any costs that are incurred during the operation of your business.
There are different kinds of business expenses which can span from the cost of storefront rent to the cost of small business employee payroll.
It is the business expenses that will also influence and play a role in whether your company will register as having a net profit or loss during a specific time period.
Generally, the two main kinds of business expenses are referred to as fixed and variable business expenses:
- Fixed business expenses are the costs you pay that do not change on a frequent basis such as your rent or insurance.
- Variable business expenses are the opposite of fixed business expenses in that they are costs that do tend to change such as utility costs or raw materials.
Expenses that your business incurs are recorded on its income statement.
Business expenses are included under the section for revenue and are deducted from the total revenue collected to determine whether the company is at a net profit or a loss
A list of Business Expenses
Different businesses will incur different costs that shape their business expenses.
It is possible for expenses to be reduced though the success of this will depend on what kind of business model the company has and what the budget of the company is.
Below is a list of common business expenses that you are most likely to incur when conducting your business:
- Business fees inclusive of subscriptions, permits, licenses, etc.
- Payments for interest
- Payments for loans
- Tax payments
- Cost of depreciation
- Insurance for small businesses
- Utilities expense
- Cost of advertising and marketing
- Payroll expenses that are inclusive of employee taxes, benefits and wages
- Cost of acquiring or maintaining office equipment
- Cost of rent or payments of mortgage
Expenses and taxes of small businesses
Companies that conduct their operations for the purpose of making a profit can have their expenditures reduced from their tax liability by reporting their business expenses.
To actually have tax liability reduced, only eligible business expenses can be deducted.
A business expense is eligible when it is both necessary and ordinary.
According to the Internal Revenue Service (IRS), a business expense is ordinary when it is a cost that is common for your business to incur and a business expense is necessary when the costs incurred are appropriate and helpful to running the business.
The ability to have the full amount deducted from your taxes or to only have the amount partially deductible will depend on the type of expenses that are incurred.
There is also the possibility of the expense not being deductible which will again depend on what kind of expense it is.
A list of deductible expenses
The following are expenses that are officially considered as deductible whether that falls under full or partial deductions:
- Self employment tax – half of self employment tax liability can be deducted if you are self employed.
- Home office expenses – home office tax deduction can be claimed if there are areas in your personal home that are being used exclusively and regularly for business purposes.
- Business mileage – business mileage can be claimed as a deduction for any miles driven solely for business purposes using a personal vehicle.
- Meals and entertainment – for eligible situations, it will be possible to claim 50% or even the whole 100% deductions on meals and entertainment expenses.
- Gifts of nominal value – costs incurred when purchasing merchandise of nominal values or other de minimis items that are given to employees for the holidays can be deducted.
- Wages of employees – in general, businesses can have the wages, bonuses, salaries or other non-cash compensation equivalents given to employees deducted from their tax liability.
- Advertising costs – in most cases, advertising expenses can be deducted as long as they are considered as reasonable and relevant to the business.
- Rent expenses – the cost of property that is rented for the sake of the business can be deducted from the company’s tax liability.
If you would like to know more information on which expenses can be deductible and up to how much the deductions are when the expenses are eligible, you can refer to the Internal Revenue Service Publication 535 on Business Expenses.
A list of non-deductible expenses
There are expenses that can be deducted and likewise, there will be expenses incurred during the operations of the business that are not deductible.
Expenses that are non-deductible include the following:
- In most cases, legal fees that are incurred while acquiring assets for the business
- Fees paid in obtaining requirements your business will need to comply with
- Expenses incurred for education to help the owner meet minimum requirements
- Expenses or losses incurred for demolition
- Payments for illegal activities such as kickbacks or bribes
- Fines and penalties served by the government such as tax penalties
- Contributions that are political in nature
- Expenses incurred for lobbying
It will also not be possible to have capital expenses deducted in a lump sum amount.
Capital expenses are composed of costs incurred when acquiring assets such as business vehicles, heavy machinery, and the like.
Instead, what is possible to do is to deduct the cost of depreciation since capital expenses cover assets that depreciate in value over time.
The Internal Revenue Service Publication 535 can be consulted for more information on small business expenses that are considered as non-deductible.
Tips for Business Expenses
There are a few practices you can implement to better manage your business expenses.
Those practices are the following:
- Keep business and personal expenses separated
- Have a budget made and attempt to stick to it
- Have accurate financial records kept
- Know which expenses are deductible and have them deducted
To make your life simpler and to better manage your company’s funds, you will first need to make sure that your personal and business expenses are kept separated.
You can start by having a bank account that is dedicated to the business only.
You will also need to log or record your business expenses and personal expenses separately.
It is not possible to claim tax deductions on personal expenses.
In the event that an expenditure is incurred for a cost that was made in part for business and also in part for personal purposes, the portion of the cost that was incurred due to business purposes can be divided from the total cost paid and be deducted.
An example of this is when an office space is set up in a business owner’s home.
The home itself cannot be deducted from the company’s tax liability however, the space dedicated to conducting business can fall under a home office deduction.
Overspending can be avoided as well as having a negative cash flow if an annual budget is created and constantly updated for the business.
When creating a budget, fixed and variable costs will need to be accounted for.
It is often emphasized and repeated numerous times but it is for good reason; your business will need to keep detailed financial records.
Keeping detailed financial records does not just mean recording every income or cash inflow the business receives.
It is also important to keep detailed records of every expense your business has to pay for.
You will need to track every dollar that is spent and have it recorded.
Receipts will also need to be kept whether they are physical paper receipts or digital in nature.
There are times when you would not be able to get a receipt.
In cases where an official receipt cannot be retrieved, a handwritten or a printed record that specifies the date, the purpose of the expense, the amount paid for and the vendor that charged the expense will need to be made and will suffice for the purposes of record keeping.
Claiming business expense deductions will help prevent you from paying more than you need to pay to comply with Internal Revenue Service rules and regulations.
Hence, it is vital to be aware of which expenses can be deducted so you know where you can claim deductions on.
Again, it should be mentioned that even if there are certain business costs that are deductible, there are other business costs that are just never going to be considered as a legitimate deductible expense.
If there are moments of uncertainties on eligible business expenses that are deductible, a tax accountant can be consulted so you can continue staying secure, sound, and profitable.
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