Whether you run a sandwich shop or a four-generation law practice, there’s at least one common experience every business owner encounters: business expenses. Business expenses are the daily costs of operating your company, from traditional utilities such as electricity and water to employees’ wages to federal and local taxes. Your business expenses are a part of your income statement and deducted from revenue to determine your net income.
Let’s review the basics of business expenses and their categorization, how the IRS defines them and what’s eligible for deductions. Here are the most common business expenses and how to stay on top of your costs so you can run your organization.
What Is Considered a Business Expense?
Although business expenses can eat into an organization’s working capital, many of them can be written off as tax deductions.
So what constitutes tax-deductible business expenses? According to Section 162 of the Internal Revenue Code, a business expense must be considered both “ordinary and necessary” to be included among business tax deductions. 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. Business expenses examples 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 example, business meals, home offices and employee benefits are all tax 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.
Types of Business, Capital and Personal Expenses
When determining what to classify as l business expense deductions, 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 cost
Many of your capital and personal expenses can be intertwined. To determine which of your items can be full business tax deductions and which should be divided, refer to IRS Publication 535.
The 25 Most Common Business Expenses List
While specific business expenses can vary by industry—for example, a restaurateur vs. a barber—there are many financial obligations that overlap for all business owners, including building, promotional and material costs. Here are 25 of the most common small business expenses:
- Home business location (dedicated space inside the home)
- Trash hauling
Materials, Equipment and Supplies
- Cell phones
- Landline telephones
- Internet services
- Necessary office equipment
- Fax machines
- Payroll taxes
Marketing and Advertising
- Print ads
- Search engine marketing (Google AdWords, Bing, Yahoo)
- Social media (Facebook, Twitter, Instagram, YouTube)
- Banner ads
- Monthly mileage
- Sporting events
- Theater tickets
- 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
- Human Resources
- 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 for your business expenses. 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 Expenses
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 for business expenses, allowing you to focus on more pressing business matters. However, monitor your business’s checking account to make sure there are enough funds to cover each installment.
Add Working Capital When Needed
In every business, there will be times when expenses outpace revenue, leaving business owners to decide whether to ride it out and hope for the best 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..