How to Categorize Expenses
Small business owners need to be savvy about bookkeeping for business purposes. Small business expenses should be categorized during the bookkeeping process to ensure financial accuracy and maximize tax deductions.
No one wants to worry about whether the books are right at tax time. Keeping expenses organized throughout the year can mitigate issues with the Internal Revenue Service (IRS). Many accounting software programs, such as QuickBooks, have become popular for this reason. The most effective way to ensure that you can manage necessary expenses is by automating the process with reliable accounting software, like that from Skynova.
This article will show you how to recognize and track the major types of business expenses and will help you decide whether they're tax-deductible.
Determining Small Business Expense Categories
No two businesses will have the same expense categories, which means that an important first step to tracking your company's finances is recognizing what you're spending and where. For example, if you are a self-employed salesperson, you may not have office space outside of your home, and airfare and similar travel expenses might be part of your business's success. By the same token, a local printmaking shop is likely to require only the occasional business trip but might have to regularly account for rent or property taxes on a business property.
Small businesses and startups should set up predefined expense categories and create a process where expenses are automatically allocated to the appropriate categories when they occur. Ultimately, this helps in knowing what to deduct for taxes and assists business owners with simplifying bookkeeping.
Skynova's accounting software can streamline the categorization process and help you account for business expenses.
3 Major Types of Business Expenses
While the actual expenses of every small business will vary widely and may change from the first year of business through to subsequent years, there are still general classifications of business expenses. Business expenses can be classified as fixed, variable, or periodic, depending on their frequency and other factors.
Fixed expenses, as the name implies, refer to business costs that don't change for long periods. Examples of fixed business expenses would be registration fees, vehicle leases, and office rent. Insurance premiums and mortgage interest can also typically be categorized as fixed expenses.
Variable expenses change from month to month. These flexible business costs can include entertainment expenses, credit card payments, utilities, and meals. This is where having an established method for keeping up with receipts can make a world of difference. Travel expenses and charitable contributions are also commonly tagged as variable expenses.
Expenses that happen infrequently and are hard to plan for or calculate ahead of time are known as periodic expenses. These could include anything from an emergency vehicle repair to the education expenses associated with keeping staff certifications current. Periodic expenses may require you to work around estimates when creating financial spreadsheets.
List of Small Business Expense Categories
It's wise to examine what your small business can expect in terms of routine expenses. While every industry is different, you can generate a decently accurate list of potential costs by studying other businesses in your field. Your local chamber of commerce can also provide insight into businesses in your area that might be relevant.
The following list presents some of the most common small business expenses that business owners can expect to encounter.
Business Expense Categories
- Payroll or salary: This line includes wages, commissions, and bonuses paid to employees or contractors. Keep payroll taxes separate from this category.
- Marketing expenses: Everything from business cards, online and offline ads, and billboards to social media management goes here.
- Rent or mortgage: Whatever real estate you utilize for your business, such as an office space, should be itemized in this slot. With the current work climate, a necessary expense is likely to be your home office. Home office deductions have become increasingly common.
- Vehicles and transportation: This category includes your company's car payment, repair and maintenance costs, and all expenses associated with the delivery of your goods or services. You can typically deduct vehicle costs using the standard mileage rate or the actual expense method.
- Utilities: Electricity, gas, internet costs, water, and cellphone bills go here.
- Website and software: Any computer programs you use to communicate with your staff, produce your company's offerings, or maintain customer relationships should be listed here, as should the breakdown of what it costs to keep your domain name and website running.
- Health insurance: This includes medical insurance premiums for yourself and may, depending on the size of your business, include percentages for your employees.
- Business insurance: Keep track of your company's insurance premiums here.
- Business tax: This section is highly contingent on where you live and your business's industry. Certain states and industries are much more highly regulated than others, and taxes may occur more or less frequently.
- Depreciation: Items like furniture, machinery, and other business equipment will naturally decrease in value the first year that you own them. Record that percentage here as its own line item.
- Business travel: Business trips, airfare charges, and other travel expenses incurred in the service of your business should be itemized here.
- Office supplies: Items like pens, paper, staples, ink, and computer equipment should be recorded, whether you work from a home office or in a formal office space.
- Charitable contributions: As these are typically tax-deductible, it might be wise to set them up like recurring invoices so you can more efficiently maximize those write-offs.
- Retirement plans: Keep track of retirement savings, such as pre-taxable income deductions to 401(k) or 403(b) plans, in their own space.
- Professional certifications and fees: This can mean educational expenses related to keeping your professional certifications valid, organization dues you may owe to an overseeing entity, or even additional state-level dues that correspond to your company's particular industry.
- Entertainment: No longer tax-deductible as of 2018, any entertainment expenses your business incurs (e.g., at events, retreats, or client lunches) need to be kept separate in your bookkeeping.
Tax-Deductible Business Expenses
Some of the more common business expenses are deemed "ordinary and necessary" by the IRS. The good news for startups and small business owners is that most ordinary and necessary small business expenses are tax-deductible. This means they are eligible for write-offs when it comes time to file a company tax return and are deducted from your company's taxable income.
Deducting business expenses takes precision and care. As business tax reforms are constant and tax obligations can change dramatically from tax year to tax year, it's important to reference IRS Publication 535 when determining what is or isn't tax-deductible for the fiscal year in question.
Non-Deductible Business Expenses
Not all business expenses are tax-deductible. Examples of non-deductible business expenses include legal fees, political contributions, clothing, any fines or penalties your business has been asked to pay, and amortization costs.
Tracking Business Expenses Is Easy With Skynova's Accounting Software
For peace of mind with regard to your business's bookkeeping, accounting software is the best way to track and manage your company's expenditures. The tracking capabilities of Skynova's accounting software can help you keep up with your business's finances, whether you need to store receipts or create income statements.
You can also take advantage of Skynova's software products and business templates. Check out Skynova today and be on your way to categorizing business expenses in a way that makes the most sense for your small business.
Notice to the Reader
The content within this article is meant to be used as general guidelines for how to categorize business expenses and may not apply to your specific situation. It's always advisable to speak to a certified public accountant (CPA) before making big financial decisions for your business.