What expense category is Loom Expenses?

In today's dynamic work environment, particularly with the rise of remote and hybrid teams, asynchronous video communication has become an invaluable tool. Loom is a popular platform that lets users quickly record and share video messages of their screen and camera, facilitating clearer communication, more effective training, and personalized outreach. For accountants and Small Business Owners (SMBs) integrating Loom into their workflows, appropriately categorizing the associated expenses is vital for accurate financial management, cost tracking, and adherence to tax regulations. This guide provides clarity on classifying Loom expenses, important elements to consider, the relevant tax implications based on IRS guidance, and how Fyle can streamline the process of managing these costs.

What are Loom Expenses?

Loom expenses are the costs your business incurs for utilizing the Loom video messaging platform. Loom allows users to create and share video recordings that can include screen capture, camera feed, and audio narration, making it useful for a variety of business applications such as:

• Team updates and internal communications.
• Software demonstrations and tutorials.
• Employee onboarding and training.
• Sales outreach and product demos.
• Customer support and troubleshooting.

The expenses are typically for subscription plans (e.g., Starter, Business, Enterprise) that offer varying features, recording capabilities, storage, and user limits.

How to Classify Loom Expenses for Accounting and Tax Purposes

Loom operates primarily as a Software-as-a-Service (SaaS) solution, and the expenses for its use are generally treated as operational costs. Here’s how these can be classified:

Primary Category: Software Subscriptions or Communication Tools

The most common and accurate classification for Loom subscription fees is "Software Subscriptions". Given its function in facilitating video messaging, it could also be categorized under "Communication Software Expenses," "Collaboration Tools," or as part of a broader "Technology Expenses" or "IT Department Costs."

• Nature: These payments provide access to Loom's cloud-based platform for a defined period and are therefore operating expenses, not capital investments in owned software.
• Tax Principle: For tax purposes, these expenses are deductible if they are both ordinary (customary for businesses that communicate or train digitally) and necessary (helpful and appropriate for the business's communication, sales, or training needs).

The 12-Month Rule for Prepaid Subscriptions (e.g., Annual Plans)

Should your business opt for an annual Loom subscription, IRS regulations regarding prepaid expenses become relevant.

As a general principle, an expense paid in advance that creates a benefit extending significantly beyond the current tax year should be capitalized.

However, the "12-month rule" exception allows for a current deduction if the benefit from the prepayment does not extend beyond the earlier of 12 months from when the benefit is first realized, or the conclusion of the tax year following the year the payment was made.

• A cash-method taxpayer can often fully deduct an annual Loom subscription in the year of payment if it satisfies this 12-month criterion.
• An accrual-method taxpayer typically allocates and deducts the expense over the subscription period, as the benefit (platform access) is consumed.

Important Considerations When Classifying

• User-Based Licensing: Loom's pricing is often based on the number of "Creator" seats. This helps track costs per user or department, if necessary, for internal accounting.
• Departmental Use: Depending on how Loom is utilized across your organization (e.g., by sales, marketing, HR for training, support), you might internally allocate these costs to different departmental budgets, even if the primary accounting category remains a type of software expense.

Examples of Loom Expenses

Business expenditures related to Loom commonly include:

• Monthly or annual subscription payments for Loom's Business or Enterprise plans.
• Fees are based on the number of "Creator" licenses purchased for team members.
• Charges for premium features such as advanced analytics, custom branding, or enhanced security options are not part of the base plan.
• Costs associated with increased video storage or transcription services, if offered as add-ons.

Tax Implications of Loom Expenses

Deductibility

Subscription fees for Loom, when employed for legitimate business activities such as enhancing team communication, creating training materials, or facilitating sales and customer support, are generally tax-deductible as ordinary and necessary business operating costs.

Timing of Deduction:

• Cash Method: Businesses operating under the cash method of accounting typically claim the deduction for Loom expenses in the tax year the payment is made. If an annual plan is prepaid, its deductibility in the payment year is subject to the 12-month rule.
• Accrual Method: Businesses using the accrual basis generally allocate and deduct the expense over the subscription service period to which it pertains, reflecting when the economic benefit is received.

Recordkeeping

To substantiate deductions for Loom expenses, businesses must maintain adequate and accurate records. These should confirm:

• The vendor (Loom).
• The exact cost of the subscription or service.
• Verifiable proof of payment (e.g., credit card statements, bank transaction details).
• The date(s) of payment or the service period covered.
• A description of the service (e.g., "Loom Business Plan Subscription for team video messaging") to support its business purpose.

Retaining all invoices, subscription agreements, and payment confirmations from Loom is crucial for tax purposes.

Automating Loom Expense Tracking with Fyle

Managing and accurately accounting for recurring cloud-based service fees like those for Loom can be notably simplified through an expense management platform like Fyle:

Streamlined E-receipt and Invoice Organization

Loom typically delivers billing information and payment receipts electronically. Fyle allows for these vital documents to be easily forwarded from your business email (such as Gmail or Outlook) into its system. Fyle's platform can then automatically extract relevant data, create an expense recordin, and digitally attach the original receipt, ensuring organized recordkeeping.

Consistent Expense Categorization and GL Integration

With Fyle, you can implement specific rules for automatic categorization of Loom expenses. This promotes uniformity in your financial data.

Effortless Credit Card Reconciliation 

If Loom subscriptions are paid via a company credit card linked to Fyle, the transaction details are captured in real-time through direct integrations with major card networks like Visa, Mastercard, and American Express. Fyle can subsequently auto-match these transactions with the corresponding Loom invoices, making the reconciliation process swift and reducing manual checks.

Direct Data Synchronization with Accounting Software

Fyle boosts robust, two-way integrations with leading accounting systems, including QuickBooks Online, QuickBooks Desktop, NetSuite, Xero, and Sage Intacct. This means that once Loom expenses are processed and verified within Fyle, they are seamlessly and accurately transferred to your company’s main accounting ledger, minimizing manual data entry and maintaining current financial information.

Comprehensive Visibility into Software Expenditures

Fyle’s analytics and dashboard features provide immediate, clear insights into all operational spending, including costs for communication and collaboration tools like Loom. This allows finance teams to monitor these expenses effectively, track them against budgets, and understand the company's investment in its technology stack.

By employing Fyle to manage Loom expenses, businesses can achieve greater control and efficiency in their financial operations, ensuring all costs associated with this valuable communication tool are accurately documented, correctly classified, and smoothly integrated into their accounting workflows.