There’s an old cliché that you have to spend money to make money. It’s the kind of thing your broke finance professor says over his glasses as he tries to tell you how smart it is to take out a huge small-business loan. (Note: Do not do this.) But, like all clichés, it does have some basis in fact. As it turns out, it is not free to run a business. If you have a business, you will have business expenses.
So, what are business expenses? They’re a little bit of everything: start-up costs, equipment you have to buy or rent, the money you spend on a place to do business (like an office or a storefront) and a bunch of other little things you never would’ve thought about before you ventured out into the wild world of business.
So, let’s talk about them.
What are business expenses?
Business expenses are the costs of running your business day-to-day. On your income statement, your business expenses are subtracted from your revenue. What’s left is your net taxable income. These “ordinary and necessary” expenses (as determined by the IRS) that keep your business running can be deducted from your taxes.
What are some examples of deductible business expenses?
If an expense meets the “ordinary and necessary” rule set by the IRS, it’s generally tax-deductible. But certain expenses like meals and gifts are only partially deductible. Here are some of the business expenses you can fully deduct from your taxes:
- Office supplies
- Rent on a building used for your business (could be an office, storefront or warehouse)
- Insurance costs
- Wages paid to employees (including independent contractors)
- Employee benefit programs
- Equipment rentals
- Bank fees
- Accounting expenses (including tax preparation)
- Utility expenses like power, internet and phone systems
- Legal fees
- Membership dues (such as to a professional organization)
- Printing and copying expenses
- Marketing and advertising expenses
- Payroll taxes
- Interest paid
Okay, about this last one: We would never recommend you go into debt to start or run your business. Debt increases your risk exponentially and causes nothing but stress. But, if you already have a business loan, you can and should deduct the interest payments. Then make sure you pay off that sucker and never borrow again. Okay?
What types of things are not deductible?
So, there are a couple of things you might consider to be business expenses that you actually can’t deduct when it’s time to do your taxes. Things in this category include:
- Donations to political campaigns or political action committees
- Memberships to social clubs or country clubs (even if you take clients for dinner or the occasional round of golf)
- Anything illegal like bribes or kickbacks (which, of course, you wouldn’t do anyway)
- Gifts over $25 in value
- Tickets to sporting events or concerts
This is where it’s really important to consult a tax pro like one of our small-business tax Endorsed Local Providers (ELPs) to help you sort out which expenses are kosher. It can save you a ton of money and hassle.
How to keep track of business expenses
Any successful business owner knows how much money you have going out and coming in. That’s how you know if your business is profitable or not. So, you need to keep track of what you’re spending. It’s just common sense.
Business taxes can be confusing. Get the help you need.
Another good reason to keep track of your business expenses is to keep your personal finances separate from your business finances. Sometimes, especially for small-business owners or people who are self-employed, that can be a challenge.
For example: Can you claim a home office as a deductible business expense? You can, actually, as long as it’s a separate room in your house and you don’t use it for anything else.
If you use a car for work, there are a couple of different ways to track those expenses. The easiest way is to keep track of how many miles you drive while on business. This is perfect for self-employed people or those who drive their personal cars for work. The current rate for calculating the mileage deduction is 58 cents per mile.1
If you own a car that you only use for business, you can track the mileage or keep detailed maintenance records and collect all of your fuel receipts—whichever gets you the biggest deduction.
Get a pro to help you with your business tax expenses
Of course, the absolute best way to keep track of your business expenses is to get a small-business tax expert to help you. Our small-business tax Endorsed Local Providers can help you with everything from bookkeeping to filing your taxes when it’s that time of year. They can help keep you on track with your quarterly tax estimates, and if there are ever changes to the tax code, your pro can be there to make sure you don’t mess anything up.