You have a great idea for a business.
[Insert great idea here].
That sounds awesome. That also sounds kind of expensive.
You heard it here first, folks: it’s not free to run an awesome business. It’s not even free to run a horrendous one. And that’s probably the first thing you should know about how to start a business.
Understanding business expenses
Business expenses are exactly what they sound like, but just to make it crystal clear:
What are business expenses?
Business expenses, also known as deductions, are costs that are incurred due to normal business operations, regardless of the size of the company. In order to calculate net income, businesses must subtract their expenses from their revenue.
A business has to spend money to make money. When a business is spending more money than they’re making, that’s called a problem. When a business is making more than they’re spending...now that’s an awesome business.
Keeping track of these expenses is incredibly important for a business big or small, and here’s why: if an expense is deemed “ordinary and necessary” by the IRS, it’s tax-deductible, meaning you’re about to save some cash.
But the list of what’s ordinary and necessary is not infinite. So what fits in that list?
Deductible business expenses
Going back to the definition from the IRS, business expenses are deductible if they are deemed “ordinary” (other businesses like yours have this expense, too) and “necessary” (the expense is helpful to your business).
This rule helps to differentiate between business and personal expenses. Is a lunch with your coworker really helpful for your business? How about that lava lamp on your desk? Unfortunately, neither of those things fall under deductible business expenses.
But here’s what does:
Most businesses need a physical location to operate from – your brick and mortar, your office space, and so on. With those spaces come mortgages, leases, rents, and utilities, all of which are considered deductible business expenses. Yes, this included phone and computer expenses too.
|NOTE: The IRS has some very strict rules about home office space deductibility. Here’s 32 pages about the do’s and don’ts of it, from the IRS itself.|
Office furniture, shelving, printers, and any other long-term assets are considered to be deductible business expenses.
The cost of these assets is a little tricky because they depreciate over time. Think of the value of a car when it leaves the lot; the cost of long-term assets does something similar where the value of the asset reduces over a period of time. Enterprise asset management software (EAM) can help larger businesses keep a tab on how much their assets are worth.
You can read more about depreciation here, and then deduct the appropriate amount.
Wages, salaries, benefits
Unless you’re running a one-man show, you’re likely using a hefty amount of your income to pay everyone who’s giving you a helping hand. Employees need to be paid wages and salaries as well as provided with adequate benefits. All of these costs are deductible business expenses.
Things like staples, printer paper, sticky notes, highlighters, and other office supplies may seem miniscule. But when you’re replenishing them every month, they can really add up. Keeping an inventory of these little things can be extremely helpful when submitting them as deductible business expenses.
The help that some software can provide a business with is unparalleled to anything else, making it essential for freelancers and businesses both big and small. All of that software is going to be important to keep track of so that you can deduct the essentials from your taxes.
Keeping an eye on the contracts your business has with vendors, down the the individual seats for your employees, can help you manage the amount of money you’re spending in the first place. With G2 Track, you can do all of that and more.
There are some special circumstances in which software is non-deductible. To be safe, check Section 179.
Advertising and marketing
Print and digital advertising costs, as well as the costs of any marketing materials and promotional materials can be deducted. Costs for the printing or digitizing of these might be plenty, but consider how much you’re paying your freelance graphic designer to come up with a new concept, as well as how much you’re paying for delivery. Those costs can be deducted, too.
Partially deductible business expenses
The list above makes it pretty clear that deductible business expenses are just that: business expenses. There are, however, times where the line between business and personal expenses becomes a little blurred.
For example, gifts, entertainment, and some travel expenses are only partially deductible according to the IRS. You may want to delve into the details of Publication 535 Business Expenses with a professional accountant to make sure you’re recording everything as accurately as possible.
Nondeductible business expenses
Finally, there are some business expenses that the IRS just won’t deduct.
First and foremost, the IRS will not deduct anything that you do not provide proof of. If you don’t have the records, don’t bother submitting it.
But even with the records, the following will never be deductible:
If you’re having a serious moral dilemma regarding your business decisions, go ahead and make them. But don’t expect to come back crying and asking for deduction when you do something sketchy.
Fines and penalties
If you make a mistake, own up to it with everything you’ve got. Including taxes.
Contributing to a party or candidate is not deductible. Costs for campaign events and lobbying need to be paid with tax, no questions asked. Contributions to qualified charities can be deducted, but contributions to political charities are a no-no from the IRS.
Clothing for work
Unless that clothing is a uniform, the cost of clothing that is work appropriate is not deductible.
If you or someone you work with is fancy enough to belong to a country club, gym, or social club, those dues are not considered deductible, regardless of whether or not you treat your clients to a nice lunch.
Meals and entertainment expenses may be partially deductible, but are seen as a separate category for deduction.
The travel costs you accrue from moving between business locations are deductible. But driving to and from work from your home is nondeductible.
Federal or state income taxes and other taxes
While these taxes may be deductible on your personal tax return, they are nondeductible from your federal business tax return.
That’s a lot to keep track of…
In reality, the definition of a business expense makes perfect sense. The hard part is keeping track of all of those expenses, and knowing which can be deducted and which can’t. If you have the time to read up on it yourself, feel free. But know that there are also professionals who are out there that would be more than happy to help you sort things out.
Check out some of our best expense management software to get you squared away.