What are Business Expenses? What Counts?
Discover how to correctly classify business expenses so you maximize tax savings without risking an IRS audit.
What are business expenses?
Business expenses are things you buy through your business for your business that write off some of the tax you have to pay. What’s not to like?
Well, unfortunately, business expenses aren’t always straight forward. So, how do you know what you can count as a business expense, and what you can’t? Today, we’ll guide you through everything you need to know and make sure you don’t make any mistakes that could come back to bite you later down the line.
What counts as a business expense?
What does and doesn’t count as a business expense is relatively straightforward – at least on the surface.
A business expense is anything you pay for or buy for your business to complete your work or produce your products. For example, if you are a graphic designer, buying a new MacBook Pro would be a business expense, as you’ll be using it daily to do generate revenue.
· staff costs (payroll, equipment, uniform, perks)
· services(such as freelancers)
· office or storefront rent and utilities
· stationary and equipment
· administrative fees and insurance
· marketing and advertising costs
· debt(credit cards and loans)
· and more.
Where it gets confusing is when you start to consider the little expenses that are incurred in the process of doing your work. For example, swinging by Starbucks on the way to the office really can’t be included as an expense – or at least, you may have a hard time convincing an accountant that it is.
Can you ever include food and drink as a business expense?
Yes, you can. If you’re taking a client out for lunch or rewarding your employees for a profitable quarter, you can include those things as a business expense. If you can’t work from your normal office and work in a coffee shop, you may be able to include the coffee and food you consume while you’re there.
Our accountant put it best: if there are two or more people involved, it can be counted as a business expense. This isn’t a hard-and-fast rule, but generally, if you are buying food and drink for you and an employee or partner, and you are discussing business or are on the way somewhere for business, you can include those expenses as a business expense.
Are deductibles and expenses the same?
Yes, deductibles is just another term for expenses. The IRS defines two types of deductibles: ordinary deductibles and necessary deductibles. Ordinary deductibles are any expenses that are common in your business, and necessary deductibles are any that are appropriate and beneficial for your business. Any expense needs to meet both of these definitions to be deductible.
Business Expenses FAQs
One of the problems with business expenses is there are so many different rules, so here are the answers to some of the most common questions we hear about business expenses.
Is my personal tax deductible for my business?
You can deduct 50% of your self-employment tax if you are self-employed.
Does my home office furniture and stationary count as a business expense?
Yes, provided it is used entirely or mainly for the running of your business.
What fuel costs count as a business expense?
Fuel costs only count as a business expense if you are actively driving to do business – for example, if you drive to meet a client, you can count that as an expense. Driving from home to a place of work (such as a rented office) rarely counts. Its easier to use the mileage method rather than actual expenses. If you aren’t sure, reach out to a local accountant for guidance.
What holiday expenses and gifts count as a business expense?
Generally, food and equipment for holiday parties for employees or clients counts as a business expense. You can usually claim 100% of these expenses, but for some, you can only claim 50% as an expense. Gifts can also be a business expense, provided they are of “nominal value.” That means no gifting your employees something of high value instead of paying them a bonus. Again, if you’re unsure, ask your accountant for clarification or check the IRS Publication 535.
Can I deduct charitable contributions?
Yes, though do check with your accountant for confirmation.
Are political donations deductible?
No – no contributions or lobbying expenses are tax deductible.
Does education or training count as a business expense?
Only if it’s to help you excel – you can’t count educational expenses if they help you get a basic understanding of how to do your business.
What are the best ways to keep track of business expenses?
· Use the right tools and technology. You’ll see a lot of different expense software available, so you’ll certainly be able to find a bookkeeping software that will help you manage your business finances. However, at the bare minimum, you need to keep track of your expenses through a spreadsheet.
· Separate your business expenses. If you’re a sole proprietorship, make sure you keep your business finances separate from your own through a business bank account. This will help you distinguish between what “you” should pay and what your “business” should pay.
· Get into the habit of tracking your money. Enter your expenses into your spreadsheet daily or weekly at the same time each day or week. This is not only a good habit so you won’t have to stress come tax time, but will also help you keep to a budget and keep your business expenses lean.
· Think through purchases carefully. It can be easy to think that spending money on an expense you can write off is kind-of like “free money” and so you’ll spend a little more, so try to think through what you invest in carefully. Consider the ROI you’ll get from the purchase and consider if it can be written off or not. If you feel a little like you’re telling a white lie, it may be best not to buy it through your business.
Once you’ve been in business for a few years, knowing which expenses can be counted as a business expense, and which can’t, will feel like second nature to you. If you ever have any doubt, reach out to your accountant or to other people in your industry for confirmation. It’s unlikely that you’ll be audited, but it will be a much easier process if you are and you have all your expenses accounted for.
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