Sparked by the modern wave of entrepreneurship, more problem solving individuals are starting their own businesses than ever recorded-and with innumerable resources offered by the internet, this number is only growing! Stopping at nothing to improve the world, more people are advancing into the world with their fresh perspectives and eagerness to march with the latest trends.
With creativity in abundance, there are only a few similarities shared between all businesses-they occur expenses. To run your business, you will detect regular costs necessary to keep running-and the IRS recognizes this as well. While impossible for any independent contractor or freelancer to avoid or escape expenses, you can use many to reduce your tax liability. Once you recognize which expenses can be deducted, you can ensure that you’re paying no more than needed on a regular basis.
Defined by the IRS, business expenses are the cost of carrying on a trade or business. The good news? These expenses are usually deductible if the business operates to make a profit.
What’s a Legitimate Business Expense?
For an expense to qualify as a deductible, it must be “ordinary and necessary” for your profession to operate. While this blanket definition deems what an acceptable expense is, it remains your responsibility to correctly characterize them while analyzing them. To master this process, first separate your business expenses from your personal expenses, and from there, your business expenses into cost of goods sold, capital expenditures, and deductible expenditures.
Personal Expenses From Business Expenses?
A common question asked by many, especially startups and small businesses, asks how to appropriately separate your business expenses from personal. Let’s say that as a freelancer you use your personal house for business purposes. To determine how much to deduct, first measure your office space and the entire house in square footage to determine the percentage of the home it compromises. From here, this percentage can measure the business portion of shared expenses including rent, insurance, and utilities. Understand that, according to the IRS, you can’t deduct personal, living, or family expenses. However, in the situation where you have an expense for something used for partly business and partly personal, you may divide the total cost between business and personal usage.
Common Business Expenses:
- Office Equipment
- Payroll (taxes and benefits)
- Business Fees (licenses, permits, etc.)
- Meals and Entertainment
Business Mileage: When using a personal vehicle for business, you may claim business mileage deduction for every business mile that is driven
Home Office Expense: If regularly using a portion of your home for business purposes, you can claim the home office tax deduction
Employee Wages: Generally, you can deduct the wages and salaries you give your employees
Advertising: Within reason, you can deduct advertising expenses related to your business
Rent: If you rent property space for your business operations, you can deduct the amount
Non Deductible Expenses
Governmental Fines/ Penalties
Requirements for your business
Cost Of Goods Sold: Expenses for inventory and activities related to inventory, cost of goods sold best serve manufacturers, wholesalers, and retailers in their efforts to track costs of products they purchase for resale
Capital Expenses: In other cases, some expenses-recorded as assets- costs are recovered by terms of depreciation. Here, cost is deducted over a time period rather than all at once.
How Do I Keep Track of Business Expenses?
With today’s modernized solutions, a plethora of software programs exist online to import business expense data. To streamline your tax preparation process, consider investing enough time to properly categorize expenses in your tax preparation
With these intuitive systems, you can edit all of your categories as you need-which allows you to generate impactful reports and profit & loss statements.
By providing visualizations on the current performance of your business, you can determine whether or not you are profitable and comprehend your money spending patterns.
However, just one minor mistake can lead you to misinterpret your financials and current state of performance, creating problems in future decisions while leading you down a deeper hole.
By choosing to initially outsource one, a few, or all of your accounting functions to experienced professionals-like our team here at MCDA CCG, INC.-you can avoid this entirely and strengthen your market position by ensuring the most out of each dollar you spend.
Whether you choose to outsource all of your accounting functions or just a portion, our team will help you build healthier financial habits to keep you succeeding today and in the future. Don’t wait, contact us today!