Whether you run a sandwich shop or a four-generation law practice, there is at least one common experience every business owner encounters: business expenses. Though they may be unwelcome at times, some costs are essential to keeping your business running like a well-oiled machine. From traditional utilities (like electricity and water) to new necessities (like Internet access), expenses are daily costs of managing a business.
In the next few sections, we’ll review the basics of business expenses and some of their categorization, how the IRS defines them and what’s eligible for deduction, 25 of the most common expenses and how to stay on top of your costs so you can run your organization.
What is a Business Expense?
Although business expenses can eat into an organization’s working capital, many of them can be written off as a tax deduction.
So what constitutes a tax-deductible business expense? According to Section 162 of the Internal Revenue Code, a business expense must be considered both “ordinary and necessary.” Ordinary expenses are costs that are common and widely-accepted in your industry or business, while necessary expenses are costs viewed as helpful and appropriate for your trade or business. Examples of ordinary and necessary business expenses include employee benefits, rental fees, local, state and/or federal taxes, business loan interest and any insurance.
These expenses are often referred to as “the cost of doing business” and are tax-deductible, in most cases, for-profit businesses. For example, business meals, home offices and employee benefits are all deductible business expenses.
What is a Capital Expense?
While business expenses are representative of day-to-day operational costs, capital expenses are the costs a business incurs for specific assets that will provide benefits beyond the tax year in which it’s purchased. For example, if you own a manufacturing business and you buy lathes and 3-D printers, these purchases should be recorded as capital expenses and, therefore, can’t be deducted as business expenses.
While you can’t deduct capital expenses, you can recoup the money you’ve spent through depreciation, amortization or depletion. These methods enable you to subtract a portion of each capital expenditure each year, allowing you to recover your costs over time. Understanding the difference will save you time and frustration later.
Categorizing Business and Capital Expenses
When determining how to classify an expense, the IRS recommends segmenting business expenses into the following categories:
- Expenses used to determine your COGS (cost of goods sold)
- The cost of products or raw materials, including freight
- Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
- Factory overhead
- Business start-up costs
- Business assets
- Business improvements
- General living costs
*It’s possible that many of your capital and personal expenses may be intertwined. To determine which of your items can be deducted in full and which should be divided, refer to IRS Publication 535.
A List of 25 Common Expenses for Small Businesses
While the average overhead costs for a small business has a lot to do with the industry you operate in and the size of your organization, there are plenty of commonalities across every business. For example, while a restaurant’s top expense is most likely its food cost, the barber one block over will also have building, promotional and material costs. are 25 of the most common small business expenses:
- Mortgage, lease, home business location (dedicated space inside the home)
- Electricity, gas, water, sewer, trash hauling
Materials, Equipment and Supplies
- Software, cell phones, landline telephones, Internet services, Postage, necessary office equipment
- Computers, printers, fax machines, paper, ink, pens, furniture
- Wages, salaries, payroll taxes, benefits
Marketing and Advertising
- Print ads, billboards, TV, radio, coupons
- Search engine marketing (Google AdWords, Bing, Yahoo), social media (Facebook, Twitter, Instagram, YouTube), banner ads, podcasting
- Monthly mileage
- Flights, hotels, meals
- 50 percent of these costs can be deducted with proper records and receipts
- Income taxes
- Self-employment taxes
- Unemployment taxes
- Workers compensation taxes
- Federal, state and local taxes
Services and Maintenance Expenses
- Facility maintenance (painting, lighting, plumbing)
- Snow removal
- Product liability
- Certified Public Accountants
How to Manage Common Business Expenses
Keep a Paper Trail
As a small business owner, it’s in your best interest to pay off as many expenses as you can via a checking account or with credit. The main advantage, beyond providing an avenue to improve your business credit score, is that paying by credit or debit establishes a paper trail. Having documentation simplifies recordkeeping and future tax write-offs, and provides payment verification. Paying for small business expenses with cash is more than acceptable, of course, it simply means the onus is on you to provide an accurate receipt of any payments if you wish to deduct them as business expenses.
Separate Business and Personal
Drawing a clear line between personal and business expenses is crucial for keeping your records clean. While sole proprietors can pay bills through a personal checking account, other business organizations don’t have this luxury. Establishing a business checking account is one of the smartest decisions you can make for your organization and provides many benefits, including the ability to accept credit cards for customer payments.
Aside from improving your customer experience, keeping business and personal expenses separate limits the amount of income tax liability surprises during tax season.
Automate Your Payment Schedules
Staying on top of your payments is the easiest way to maintain good standing with lenders, vendors and creditors. Signing up for automatic payments removes the risk of missing a payment, allowing you to focus on more pressing business matters. However, you still need to monitor your business’s checking account to make sure there are enough funds to cover each installment. Automatic payments don’t remove every risk, but they certainly reduce the possibility of certain human errors.
Add Working Capital When Needed
In every business, there will be a moment or two when expenses outpace revenue, leaving business owners with a decision to make: ride it out and hope for the best and exhaust working capital or pursue small business financing. When used properly, small business funding—whether for a sudden opportunity or an emergency expense—is an extremely helpful tool. With small business financing, owners can cover their costs during a specific period, handling anything from operating expenses to payroll. The Final Word on Small Business Costs.
Expenses are a reality for every business, regardless of size or financial might. If left unchecked, they can become an issue that impacts everything from how you run your business today to how—and when—you can grow in the future. Once per quarter (or at the very least once every six months) we recommend that you review your expenses to see where your business can reduce, tweak or cut certain costs.
Ultimately, anticipating your costs and establishing a sustainable payment schedule and internal structure that allows you to get the most of out of your working capital is key. You won’t be able to trim everything, of course—common business expenses are likely to remain steady for the foreseeable future. But a few hundred dollars saved here and there becomes working capital you can invest in other parts of your business.