Businesses generate significant expenses that can be challenging to track. If combined with poor bookkeeping, this can make running your business more complicated than needed. But there's another reason you need to organize your business expenses: Figuring out your tax deductions.
To reap the benefits of business tax write-offs, you must account for all the business expenses incurred by your company. Then, you can deduct these expenses from your income, lowering your tax liability. But where does one start?
This article covers everything you need to know about categorizing business expenses. In addition, it is a good starting point to understand how to organize your spending to maximize your tax deductions in 2022.
Why Do You Need Business Expense Categories?
The IRS defines business expenses as "the costs of carrying on a trade or business."
Running a business means tracking expenses across departments, projects, cost centers, individuals, and more. This could be a daunting experience. But, if not sorted, these business expenses can become an absolute nightmare once tax season rolls around.
Dividing your expenses by category can help maximize your tax deductions. For example, some business spend are tax-deductible, so knowing which class each expense falls into enables you to ensure you take advantage of all the deductions.
What's more? Having expense categories can:
- Provide insight into what, where, and why money is spent
- Enable data-driven decisions around budgeting and cost optimizations
- Document and organize spending plans specifically for investors or lenders
- Provide a bird's eye view of historical, current, and future spend across different expense categories
While doing this manually can hurt your business with manual errors and slips, sorting your expenses into categories doesn’t have to be complicated. You can use multiple tools to do this, like a business credit card or an expense management software. This doesn't just make it a one-click process but also gathers, interprets, and guides business owners and Finance teams to keep track of their business expenses and deductibles.
Essential Business Expense Categories
If you’re making a list of business expense categories for the first time or simply need a reminder, here are the most common types you might want to include:
The good news for those renting a commercial space for their business is that the utilities' taxes are fully deductible. Utilities often include expenses like electricity, water, internet, phone, sewage, and trash pickup.
2. Rent or Mortgage Costs
If you’re paying rent for the office space, you’re likely eligible for a tax deduction on the interest rate. The same applies to mortgage costs. These costs fall under the category of occupancy expenses, which are costs related to the operation of your business. Other occupancy expenses include property taxes, insurance, and office space repairs and maintenance.
Be sure to keep track of all your rental or mortgage loan payments throughout the year and of any other associated costs so that you can accurately report them on your tax return.
3. Office Supplies and Office Assets
Office supplies, including stationery, cleaning supplies, paper towels, and assets such as office furniture, can amount to a sizeable tax deductible. Please note that assets worth more than $2,500 aren’t deducted but depreciated.
4. Business Trip Expenses
Business trip expenses are tax-deductible, but the IRS has strict rules about what qualifies as a business trip expense. Firstly, the trip’s primary purpose must be to conduct business activities, such as meeting with clients or suppliers, attending conferences and trade shows, or training employees. If the business trip has a mix of business and personal expenses, ensure you report the right ones to get the correct deductions.
Generally, you can deduct any expense considered necessary for business. Tax-deductible business trip costs include flights, gas, hotels, meals, and parking fees. Remember that only half of the tax gets written off when it comes to meals.
Marketing is key to keeping a business alive. However, marketing costs can be pretty hefty, especially if you use mediums like Instagram, Facebook, or even have your own app. Therefore, tax exemption for advertising can really make a difference.
6. Employees’ Salaries
Business owners can deduct the salaries of their employees as a business expense. This deduction also includes any bonuses, wages, commissions, or other payments made to workers. The costs must be reasonable and necessary for conducting business to qualify for a deduction.
7. Employee Training
If you’re offering skills training to your employees, you’ll be able to deduct tax. This includes the cost of sending employees to training courses and providing in-house training. The only restriction is that the education must be for job-related skills your business requires.
8. Business Insurance
Liability insurance, worker's compensation, disability, and other business-related insurance are deductible. However, commercial auto insurance is a bit more complex; if you use the vehicle solely for commuting, it doesn't count as a business expense. On the other hand, driving the car for business reasons but still using it for personal purposes will likely grant you a partial tax deduction.
9. Bank Fees
Businesses can deduct bank fees as business expenses. This includes maintenance, business loan interest, and nonsufficient funds fees. Therefore, keeping track of these expenses is essential to stay organized and optimize deductions come tax time.
You must include the gadgets you need to purchase for your business as a business expense category. You can deduct the cost of these items as a business expense if used for work-related purposes.
You can also deduct the cost of computers, tablets, or cell phones from your taxable income. However, if you use them partially for personal purposes, then you likely won't get more than half of the amount deducted.
11. Printing Expenses
Self-employed individuals can get a tax deduction on printing expenses necessary to run their business. This includes the cost of paper, ink, and other supplies used for printing business-related documents. Additionally, self-employed workers can deduct the cost of repairs and maintenance for printers and other office equipment.
12. Software Expenses
Software used for business purposes may be eligible for a tax deduction. These costs consist of purchasing and installing software and paying subscription fees.
The deductible amount will depend on the type and use of the software in your business. For example, accounting or project management software falls into this category. Therefore, if you use accounting software to track your expenses, you can deduct the entire cost when tax season comes. However, if you use the software for personal purposes as well, you can only deduct a portion of the cost.
13. Website Expenses
Nowadays, having a website is crucial for running a successful business. The good news is that you can get tax deductions for web hosting and domain fees. The IRS hasn’t outlined the rules for this category yet, but it can be put in the advertising category.
14. Internet Expenses
The internet is a necessary tool for most businesses. It allows them to stay in touch with clients, customers, and suppliers, research new products and services, and promote the business. As a result, the IRS considers internet usage to be a tax-deductible business expense. So remember this the next time you’re on a flight and need to purchase an internet package to stay in touch with clients.
This may come as a surprise, but you can get a tax deduction if you buy presents for your business associates, clients, or employees. This encompasses everything from small tokens of appreciation to more items such as vacations or jewelry. As long as the gift is given to promote business relations, it’s considered a valid deduction.
Seamlessly Track Your Business Expenses and Tax Deductibles With Fyle
An expense management software like Fyle can make the life of your Finance teams and employees much easier. Employees can use the receipt scanning feature within the Fyle app to submit their expense reports on the go. Approvers can also use the same app to review and approve expenses at their convenience. This means all your receipts are stored digitally in a secure location, which can benefit your business in the following ways:
- Receipts are the only proof of expense for businesses. It enables you to identify taxable and non-taxable expenses.
- Receipts can ensure you’re able to easily track all deductible expenses so you can claim them on time.
- Also, remember that the IRS requires receipts as proof of expense for any transaction above $75.
Categorizing your business expenses will allow for a straightforward presentation of your expenditures. By sorting your budget, you can gain more insight into where your money goes. This cheat sheet outlines fifteen such categories, including bank fees, printing expenses, and website costs. Keeping track of these expenses throughout the year can help you get tax deductions and keeps your small business healthy.