Deducting Expenses for your Business

Small Business owners wear a lot of hats and the pace can get hectic. New ideas, new clients, new ways to transact, marketing and employee management are just a few of the things you need to handle on a day-to-day basis. You need to be on top of all of this, in addition to making sure that your small business is managing the costs involved in your business. At this time of year, you will also need the information for your upcoming tax filings.

Finding Your Business Expenses

This is accomplished through efficient and accurate business expense management. Shipping expenses, office space and supplies, marketing, client meetings, and auto expenses are among the many types of legitimate expenses you can use to reduce your taxable income at tax time and keep more of your earnings for yourself.

That’s because expenses that are common to your business segment – i.e. considered to be essential, ordinary and necessary – will offset your gross income, and reduce the tax you will be subject to on the income generated by your small business.

Here is a list of common deductions that business owners make in any given tax year:

Rent or office lease and utilities for this space
Internet, phone and software
Office Supplies
Equipment (large, expensive equipment may need to be capitalized)
Equipment rental and Equipment repair
Furniture
Payroll and Commissions (Employees and Independent Contractors)
Employee training and education (including subscriptions and publications)
Membership dues
Bank fees and interest payments
Business travel and vehicle use
Business meals – 100% IF provided by restaurants
Advertising and marketing
Legal fees
Insurance
Taxes (real estate taxes, payroll/self-employment taxes, etc.)
Retirement plans and other benefits
Home Office and Car *

Note: Startup expenses and start up fees including legal and state filings and can be deducted as well. Some can be deducted in your first year while others will be spread out over several years..

*It is critical to track all expenses in your quest to do business, including any cost or expense that may overlap with your personal life. The best examples of these include the shared use of your home and your car. As long as you can determine the business use percentage of such assets, all you really need is the total amount you spent, then apply the percentage against the total, and ca-ching, there is your business write-off. This method can be applied to other things such as cellphones, internet, security systems, property tax and even the cost of applying for and getting a loan, but there are limitations on certain categories.

Check with your tax accountant to be sure you understand which business assets, expenses and improvements must be capitalized rather than deducted. In other words, instead of deducting 100% of the expense in a given year, some assets such as building or large/expensive equipment would be depreciated over several years.

Categorizing Your Business Expenses

It helps to classify your business expenses. This can define how you prioritize them in budgeting, and it’s easier to spot areas where you can trim costs if you need to.

Fixed: Fixed expenses are for items that do not change or only slightly change from month to month. For example, your monthly rent or lease.

Variable: Variable expenses are those that fluctuate from month to month such as utilities, commissions and travel expenses.

Periodic: Periodic expenses are less frequent expenses and are often unexpected. For example, equipment that may suddenly need to be replaced or repaired. These can be difficult to plan for.

Developing Good Internal Practices

A word to the wise: Be sure to save your receipts, including purchases made on a credit card as the statement itself does not meet the IRS guidelines for proof of a business expense. Record and review your expenses regularly. This should become a habit to provide the flexibility to make changes as needed. While Excel can be used, it is best to set up your books in an accounting software so you can easily review data and reports. Lastly, collect information from your vendors throughout the year to be ready for issuing Forms 1099 in January. Review the best practices for Avoiding Penalties on Forms 1099 here.