Business expenses are any payments incurred for the sake of running the company’s operations. This definition might seem lucid, but what does it mean for you? First and foremost, you have to be knowledgeable about the business expenses you have accrued. Or you will be paying more than necessary.
In this guide, we’ll help you understand business expenses, tax-deductible and non-deductible expenses, how to keep track of these costs, and most importantly, maximizing your company’s profits from legitimate expenditures.
Business Expenses Explained
We can’t elude spending as you run a company. As mentioned, these are the costs incurred from a business’s daily operations. These can range from minor items such as office stationery to tangible or services paid for to run business functions.
Don’t get it wrong. Personal items and expenses should never form part of business overheads. I know the line between personal and business expenses might be clear, but mixing the two can be a significant setback in your company’s paperwork, taxes, and overall operations. Additionally, it would be best to separate capital expenses and expenses used to determine the cost of goods from business expenditures.
Read more on Reasons to Separate Personal and Business Finances
However, in some instances, you might find business and personal expenses incurred by an entrepreneur intermixing. For example, a delivery guy might purchase a motorbike he uses partly for delivery activities and partly for personal use. In this case, you deduct the portion of kilometres used for delivery purposes and include it as business costs. Still, if you use something wholly or partly for business, it’s essential to have a record of the purchase. For a much more complex scenario, like a home office, you can lay claim to a segment of the area used as a home office, but not the entire house.
Expenditures differ by type of business. Therefore, you can reduce or do away with some overheads depending on your business model and budget. And that’s the reason why the taxman categorizes business costs as either ordinary and necessary.
As the name gives it away, ordinary expenses mean that they are prevalent and accepted in your business and your type of industry in general. On the other hand, necessary expenses can be helpful and relevant to your business. Therefore, you can expense these costs, and consequently, they are tax-deductible.
Some business expenses are either fully deductible or partially deductible. That’s because the taxman extracts tax-deductible expenses from business profits so that you have a less significant tax bill.
The following are examples of tax-deductible expenses:
- Advertising & marketing
- Workers salary/wages paid to contract employees
- Insurance payments
- Training costs for your team
- Maintenance and repair work
- Meals and entertainment costs incurred in the cost of running your business
- Employee benefits programs, like a retirement scheme
- Office-related expenses
- Interests paid
- License and regulatory fees
- Business mileage. As mentioned, you can claim the business mileage deduction for business-related activities.
- Office lease and rent payments
It’s vital to keep receipts for all expenditures, whether paper originals or electronic copies. Failing to produce receipts or proof of payments might lead to unexpected tax bills.
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This is the type of cost that’s not reportable. In layman’s language, non-deductible costs do not affect your tax bill.
Lobbying fines, Government fines, and penalties, and bribes are some common examples of nondeductible expenditures.
Tracking Business Expenses
The majority of your business expenditures are bound to be tax-deductible. So, while tracking costs can be an onerous task, in the long run (tax season), you might save on some cash. Not to mention, you might find yourself under immense pressure and stress come deadline day if you delay tracking business expenditures.
Read more in a related post: are you tracking your business expenses?
Maximizing Profits From Business Expenses
It’s no brainer that subtracting overheads from revenues will determine how your bottom line will appear. Efficient spending is critical for a business to turn a profit. Still, limited spending might inhibit your venture from turning better profits.
Therefore the key is analyzing the most productive ways of spending capital. This way, you can pinpoint critical areas your business can cut costs and, areas your company could benefit from higher expenditures.
Income Statement Reporting
An income statement indicates your business revenues, expenses, taxes, and, importantly, net profits.
Typically, on the income statement, a business should classify its expenses as:
Overheads related to the provision of services or manufacture of goods. For example, labour and cost of raw materials.
As the name suggests, they are not directly related to business costs but are incurred from other general costs such as rent, utilities, and advertising profits. Subtracting indirect costs from gross profits determines a company’s operating profit.
Other sections of the income statement are:
- Depreciation- Determines expenses of business assets. It’s classified as a tax-deductible expense.
- Meals and leisure costs- As mentioned, you can fully deduct these expenses, but conventionally, you can remove half of it.
- Interest expense- represents the amount of interest paid on any business borrowing.