In this article, we will discuss the importance of including business expenses in budgeting and tax planning. We will review the different types of expenses you need to consider when planning your business budget and filing your tax return. We will also provide answers to some common questions on this topic.
Why are budgeting and tax planning important?
Budgeting and tax planning are among the most important financial tasks for a business owner. Financial planning, especially cash flow monitoring, helps prevent overspending and falling into trouble with payments.
Tax planning helps avoid unexpected payments at tax time and helps keep taxes as low as possible. While different types of businesses have different expenses, many common types of expenses exist.
Location costs
Every business needs a place to operate, and there is usually a cost for the location. This could be due to a mortgage on a building, rent on office or commercial space, or part of the cost of space in your home if you have a home-based business.
Let’s take a closer look at some monthly location costs:
Mortgage: If you own a building and have a mortgage on that building, the interest on the mortgage is usually deductible. The building itself is considered an asset that is depreciated (i.e., the cost of purchase is spread out over time). You can deduct depreciation expenses for the current year.
Lease: If you rent a building or commercial space for your business, you can usually deduct the cost of rent payments and other costs associated with the lease. You can only deduct payments for the current year.
Home office: If you have a business in your home, you can deduct some of your home office expenses, as long as the space is used regularly and exclusively for business purposes.
Utilities, phone, and computer expenses: If your business is located in a building you own outside your home, your business will need to pay utility costs. This can include electricity, gas, water, phones, and other municipal services such as garbage collection. If you are renting a location, some of these costs may be included in the rent.
If you have a business at home, your residential landline phone is not a deductible business expense, but you can deduct long-distance calls that are business-related. Additionally, you can deduct the cost of a second line for business use.
You are likely able to deduct the cost of your mobile phone used for business, along with internet and computer expenses.
Equipment, furniture, and machinery
You can deduct the cost of purchasing items such as office furniture, retail shelving, machinery, and anything else you have in your business that lasts more than a year. Tax experts call these “capital assets” and they must be depreciated (costs are spread over a number of years).
Some equipment you buy for your business may be listed property. The main categories of listed property are passenger vehicles, transport vehicles, and property used generally for entertainment. Listed property is a special category for tax purposes that requires you to keep business and personal costs separate and deduct only the business portion of the expenses.
Vehicles and driving expenses
If you purchase a car or truck for your business, the cost is depreciated like other assets mentioned above. To qualify for the depreciation deduction, the vehicle must be driven more than 50% of the time for business purposes.
You can also deduct the cost of driving your car for business using one of two methods: the standard deduction or actual expenses.
Other services and maintenance expenses
Most businesses incur maintenance costs on buildings and equipment and public property maintenance. Companies also incur costs for tree trimming, snow removal, and other external costs. You may be able to deduct costs for repair and maintenance of your business property, or you may be able to depreciate some of these expenses. You might want to review these depreciations with a tax professional.
Insurance
Business Expenses
Every business requires various types of insurance, and you can deduct the costs of insurance as a business expense. You may need to deduct accident, theft, professional liability, auto insurance, and many other types of insurance.
Salaries, Wages, Payroll Taxes, and Benefits
You will need to pay salaries to employees according to the payroll system you have set up. The costs of employee salaries and wages, along with some employee benefits, can be deducted from your business. You can also deduct employment taxes, including:
- Employer portion of Social Security / Medicare taxes (FICA)
- Unemployment taxes (federal and state)
- Workers’ compensation payments
Here is a list of some employee benefits that you can deduct as a business expense. You should also be aware of the benefits that are taxable to employees.
Supplies and Other Office Expenses
You can deduct the costs of materials and supplies you use throughout the year. If you keep secondary materials and supplies, you can deduct them if you do not maintain a record of them or take an inventory, and if this method does not distort your income for the year.
Professional Fees
You can deduct the costs of fees paid to professionals, including your attorney, tax advisor, and other professional consultants. You may not regularly hire or pay these professionals, but you should allocate a budget for this category in case of need.
Legal and professional fees paid in the process of purchasing business assets, including buying or starting a business, are not deductible. They are added to the basis of the property and listed in depreciation or amortization for the property.
Advertising and Marketing Expenses
You will want to deduct advertising costs that include social media marketing and other marketing and advertising expenses such as newspaper ads, billboards, and online ads. You can include web maintenance costs here or categorize these costs under office expenses.
Membership Fees for Clubs and Trade Associations
Membership fees for a professional association or trade group should be included here as well as professional publications. For example, you can deduct the cost of joining a chamber of commerce or a professional or trade association. However, you cannot deduct membership costs for any club organized for social purposes, such as a sports club, billiards club, or aviation club, even if you conduct business there.
Travel Expenses
For these expenses, you will need to:
- Include them in the monthly expense list for budgeting and
- Maintain good records to show the business purpose of each expense at tax time.
Travel expenses: Track airfare, hotels, and meals while traveling.
Business meal expenses: You will only be able to deduct 50% of these costs, but do keep detailed records and include them in your budgeting and taxes nonetheless. Business entertainment expenses are not deductible.
Frequently Asked Questions (FAQs)
What should be included in a business budget?
The budget should include estimated revenues and estimated expenses. Determine how much it will cost to produce your product and how much you can reasonably expect to sell it for. Over time and as your business grows, you will be able to get a more accurate picture of your business’s costs and revenues. You can check out our sample business budget template for an idea of potential costs to consider, including phone, utility, license costs, office supplies, and advertising expenses.
What are business expenses for taxes?
Business expenses that you can deduct on taxes are those that are considered “ordinary and necessary” according to what the IRS states. Ordinary costs must be common and accepted in your industry. Necessary costs need to be helpful to your business, but not necessarily critical to be deemed necessary. You may not be able to deduct all ordinary and necessary expenses, but some costs you might be able to deduct include office supplies, insurance costs, and vehicle expenses.
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Sources:
IRS. “Publication 946, How To Depreciate Property.”
IRS. “Publication 535, Business Expenses.”
TurboTax. “Mobile Phones, Internet and Other Easy Tax Deductions.”
IRS. “Topic No. 704 Depreciation.”
IRS. “Publication 463, Travel, Gift, and Car Expenses.”
Source: https://www.thebalancemoney.com/dont-forget-these-monthly-business-expenses-397485
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