Business Expenses: Best Practices for Instituting These

Business expenses are all the costs required to keep an existing business running. If you operate a for-profit, a wide variety of expenses are tax-deductible. Deducting business expenses helps reduce your taxable income. This article provides an overview of business expenses, examples of deductible and non-deductible costs and ways to effectively manage expense reporting.

 

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A quick overview of business expenses

Here are the basic things to note about business expenses:

  • Ordinary vs. necessary 
  • Examples of deductible expenses
  • Examples of non-deductible expenses
  • Suggestions for reporting expenses

 

Ordinary vs. necessary

In order for a business expense to be deducted, it must be ordinary and necessary, as defined by the International Revenue Service (IRS).

An ordinary expense is commonly used and widely accepted among industry standards of the trade your business is in. A necessary business expense is an expense that helps you run your business.

Examples of ordinary and necessary business expenses include costs associated with advertising, such as online ads or building your social media audience.

 

Examples of deductible expenses

There are many expenses you can deduct for your business. Here is a list of the most common business costs with examples:

 

  • Location costs: Mortgages and leases
  • Utilities: Gas, electric, water, sewer and trash pickup
  • Technology: Business phones, computers and employee cell phones
  • Furniture and equipment: Desks, tables and chairs, retail shelving, printers, industrial machinery
  • Vehicle and driving costs: Company cars, trucks and gas
  • Maintenance costs: Snow removal, lawn care and janitorial services
  • Business insurance: Property, casualty, liability, interruption and specialized insurances
  • Employee payroll, taxes and benefits: Health plans, life insurance, bonuses and education assistance
  • Office supplies: Paper, ink, pens and envelopes
  • Professional fees: Attorney, CPA/tax advisor and other consultants
  • Advertising and marketing: Social media marketing, events and other promotional activities
  • Travel expenses: Plane tickets, hotels, meals and rental cars

 

Examples of non-deductible expenses

While many expenses are deductible, there are some non-deductible expenses to be aware of:

 

  • Tax return penalties and fines: Underpayment of estimated tax penalties or not paying estimated taxes, and any other fines or penalties related to your federal tax return
  • Contributions to political campaigns: Any lobbying or political events attendance costs
  • Capital expenses: Purchases of vehicles, equipment and other long-term capital assets (some start-up costs are exceptions)
  • Your tax bill: Gift taxes, federal and state income tax and other taxes (some states may allow you to deduct a portion of your federal tax bill)
  • Hobby losses: Losses resulting from expenses doing an activity that is a hobby and not business activity
  • Dues for clubs: Fees for country clubs, health clubs and other social clubs, even if you take clients or customers there
  • Costs for commuting to work: Cost of driving to and from work is non-deductible.
  • Business clothing: Company uniforms are an exception
  • Business gifts: Any amount paid above $25 may not be deducted
  • Home office space: Home offices may be deductible under strict IRS criteria
  • Entertainment expenses: Sporting events, concerts, resort trips and other entertainment expenses

 

Suggestions for reporting expenses

Because so many expenses qualify for tax deductions, keeping diligent track of them is crucial. Here are some suggestions for efficiently reporting your expenses:

 

  • Digitalize your receipts right away. Taking photos of your receipts once you receive them will give you a digital record in case you lose them.
  • Automate your expense reports. Automated reports reduce mistakes and will save you and your accountant time organizing information.
  • Use an expense management app. Utilizing an app will help get your expenses approved and reimbursed faster.
  • Project your expenses. Entering real-time insights into an app can help you make data-driven decisions, and catch potential budget issues before they happen.
  • Digitalize credit card statements. Many companies require employees to match expenses with the transactions of their credit card statements. By taking a picture of your statement you can digitalize it just like your receipts.

 

Three expenses to be wary of

Some business expenses are more complicated and have strict rules. Take precautions when deducting the three following business expenses:

 

Vehicles and driving expenses

For a vehicle to be eligible for a business expense deduction known as a “depreciation deduction,” it must be used at least 50% of the time for business purposes only. Keeping detailed records on your company vehicles will help you avoid an IRS audit.

 

Home business space

For a home space to be tax-deductible it must be used only for business purposes. Even if it is used once during the year for a non-business purpose, it could lose its deduction eligibility. It’s also important to only deduct the actual square footage of space being used for business and make sure there are no personal items in that space.

 

Employee bonuses, awards and gifts

Rewarding employees is a legitimate business expense, but consider the limits and taxes that may result. For example, gifts are only taxable up to $25 and bonuses are subject to employee income tax.

 

Business expenses management best practices

Here are some expenses management best practices that you can easily implement into your business to maintain a clear expense policy:

 

Define your expense management policy

Create an unambiguous policy regarding expense management for your business. Define employee expense reimbursement policy and communicate with employees how to report these expenses.

 

Keep the policy clear and simple

The policy should clearly define guidelines for expenses in simple language everyone can understand.

 

Keep reports concise

Ask employees for only the relevant details about their reimbursable expenses to make the task of reporting more streamlined. 

 

Make expense submission easy

Filling out a reimbursement report should be simple and quick. Paperless expense reporting for employees is a more accurate way to do this.

 

Business expense frequently asked question

Here’s one of the most commonly asked questions about business expenses: 

 

Can business expenses be carried forward?

When deductions for your tax year are greater than your income, you may have a Net Operating Loss (NOL), which could be carried over as a loss and deducted from future tax years, reducing your taxable income for those years. Specific adjustments are required by the IRS to your taxable income to determine how much NOL you may apply to the current tax year and how much you are allowed to carry forward. Current tax reform laws state that businesses may not deduct more than 80% of their taxable income for losses obtained after December 31st, 2017.

 

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