What expense category is Zoom Expenses?

In the modern business landscape, tools that enable remote communication and collaboration are no longer a luxury but a necessity. Zoom has become a leading platform for video conferencing, webinars, and online meetings, connecting teams and clients across geographies. For accountants and Small Business Owners (SMBs), correctly categorizing Zoom expenses is vital for accurate financial reporting, effective budget management, and compliance with tax regulations. This guide aims to clarify how Zoom expenses should be categorized, their tax implications, and how Fyle can simplify their management.

What are Zoom Expenses?

Zoom expenses encompass the costs your business incurs for utilizing the Zoom platform and its associated services. Zoom primarily operates on a subscription model, offering various plans (like Basic, Pro, Business, Enterprise) tailored to different needs, from individual users to large organizations. These expenses are generally for services that facilitate video and audio conferencing, webinars, chat functionalities, cloud phone services (Zoom Phone), and other collaboration features.

How to Classify Zoom Expenses for Accounting and Tax Purposes

Given that Zoom services are typically provided as a Software-as-a-Service (SaaS) subscription, their classification follows certain accounting and tax principles:

Operating Expense - Software Subscription or Communication Tool:

• Zoom subscription payments are most commonly classified as a software subscription expense. Alternatively, businesses might categorize them under a broader office expenses, communication expenses, or even utilities (if heavily used like a phone line, though less common for SaaS) category in their chart of accounts.
• These costs are incurred for the regular operation of the business and are therefore considered operating expenses.
• For tax deduction purposes, business expenses must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business, and a necessary expense is one that is helpful and appropriate for your business. Zoom subscriptions used for business meetings, client communication, and team collaboration typically meet these criteria.

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

• Businesses often opt for annual Zoom subscriptions to avail of discounts. When an expense is paid in advance, such as an annual subscription, IRS guidelines on prepaid expenses apply.
• Generally, you cannot deduct expenses paid in advance if they create an asset with a useful life extending substantially beyond the end of the current tax year.
• However, there's an important exception known as the "12-month rule." You do not have to capitalize (and then amortize) amounts paid for creating an intangible asset (like a prepaid subscription right) if the right or benefit created does not extend beyond the earlier of:

1. 12 months after the date you first receive the right or benefit, OR
2. The end of the tax year following the year in which you made the advance payment.

• For a cash-method taxpayer, if an annual Zoom subscription meets this 12-month rule, the entire payment can generally be deducted in the year it's paid.
• For an accrual-method taxpayer, you generally deduct business expenses when both the all-events test has been met (all events fixing liability have occurred and liability can be determined with reasonable accuracy) and economic performance has occurred. For a subscription service like Zoom, economic performance occurs as the service is provided or used. Therefore, accrual-basis taxpayers would typically expense the cost of an annual Zoom subscription ratably over the subscription period.

Distinction from Purchased Software (Capitalization and Amortization):

• It’s important to differentiate a Zoom subscription (SaaS) from an outright purchase of software. If your business were to purchase software that it owns and that has a useful life of more than one year, that software would generally be treated as an intangible asset.
• Off-the-shelf computer software that is readily available for public purchase, subject to a nonexclusive license, and not substantially modified, is typically depreciated using the straight-line method over 36 months, unless it qualifies for immediate expensing under Section 179 or for special depreciation allowance (if applicable).
• However, standard Zoom usage involves paying for the right to use the software for a defined period (monthly or annually), not acquiring ownership of the software itself. Thus, these are typically operating expenses. Capitalization and amortization would generally only be considered if a business makes a very large, one-time payment for a long-term custom software solution, which is not typical for standard Zoom plans.

Examples of Zoom Expenses

Common expenses associated with using Zoom for business include:

• Monthly or Annual Subscription Fees: Payments for standard plans like Zoom Pro, Business, or Enterprise.
• User Licenses: Costs are based on the number of licensed users within the organization.
• Add-on Features: Fees for specific functionalities such as:
  
  • Zoom Webinars
  • Large Meetings (increased participant capacity)
  • Cloud Recording storage upgrades
  • Zoom Phone (cloud-based phone system)
  • Conference Room Connectors
• Pay-Per-Use Charges: Some services, like certain international calling rates through Zoom Phone, might incur charges based on usage.

Tax Implications of Zoom Expenses

Deductibility:

Zoom expenses incurred for legitimate business purposes are generally tax-deductible as ordinary and necessary business expenses. This includes subscription fees and costs for add-ons used in conducting your trade or business.

Timing of Deduction:

Cash Method: Businesses using the cash method of accounting generally deduct expenses in the tax year they are paid. For an annual Zoom subscription, the entire amount can often be deducted in the year of payment if it falls under the 12-month rule.

Accrual Method: Businesses using the accrual method generally deduct expenses when they are incurred (all-events test met and economic performance occurs), which for a subscription means over the period the service is provided.

Recordkeeping:

Maintaining proper records is essential to substantiate these deductions. Supporting documents should show the payee (Zoom), the amount paid, proof of payment (e.g., credit card statement, bank statement, canceled check), the date the expense was incurred or paid, and a description confirming it was for business use.

Examples of adequate records include:

• Invoices from Zoom.
• Credit card receipts and statements.
• Canceled checks or other documents reflecting proof of payment/electronic funds transferred.

These records should be kept in an orderly fashion and in a safe place.

Automating Zoom Expense Tracking with Fyle

Manually tracking Zoom subscriptions and other recurring software expenses can be a tedious chore for accountants and SMB owners. Fyle’s expense management platform offers robust automation features to streamline this:

Automatic E-receipt Collection: 

Zoom typically sends invoices and payment confirmations via email. Fyle allows users to forward these e-receipts directly from their Gmail or Outlook inboxes. Fyle's AI-powered engine can then automatically create an expense entry, attach the digital receipt, and extract key data like vendor name, amount, and date.

Real-time Credit Card Feeds & Automated Reconciliation: 

If Zoom subscriptions are paid using a company credit card linked to Fyle, transaction data can be pulled in real-time directly from Visa, Mastercard, or American Express networks. This allows for instant notification and prompts employees to submit receipts immediately. Fyle then automatically matches these transactions with the corresponding receipts, reconciling expenses in seconds rather than days or weeks. This can be done without needing to switch from your existing credit cards.

Smart Categorization and GL Coding: 

Fyle can be configured with custom business rules to automatically categorize Zoom expenses under the correct expense account (e.g., Software Subscriptions or Communication Expenses) and assign the appropriate General Ledger (GL) codes. Fyle integrates with your accounting software to import your chart of accounts, projects, departments, and other dimensions, ensuring accuracy and consistency.

Seamless Accounting Integrations: 

Fyle offers deep, two-way integrations with major accounting platforms like QuickBooks Online, QuickBooks Desktop, NetSuite, Xero, and Sage Intacct. Once verified, Zoom expenses are automatically exported to your accounting system in real-time as credit card charges, bills, or journal entries, eliminating manual data entry and reducing errors.

Comprehensive Spend Visibility: 

Fyle's dashboard provides a real-time overview of all business spending, including software and communication expenses. This allows accountants and SMB owners to easily track Zoom costs, monitor budgets by department or project, and identify any unexpected changes in spending.

Project and Departmental Allocation: 

For businesses that need to allocate Zoom costs to specific projects, clients, or departments, Fyle enables these dimensions to be added to expense forms for precise cost tracking and reporting.

By using Fyle, businesses can efficiently manage their Zoom expenses, ensuring timely capture, accurate categorization, swift reconciliation, and effortless syncing with their accounting systems, ultimately saving time and improving financial control.