What Are Business Expenses? Definition with Examples
Business expenses are ordinary and necessary costs a business incurs in order for it to operate. Businesses need to track and categorize their expenditures because some expenses can count as tax deductions, resulting in significant cost savings.
Here’s What We’ll Cover:
What Can You Write off as Business Expenses?
What Are Examples of Business Expenses?
Can Business Expenses Be Carried Forward?
Can I Deduct Personal Expenses for Business?
What Are the Three Types of Expenses?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Can You Write off as Business Expenses?
Allowable deductions are ones that are considered by the IRS to be both “ordinary and necessary”.
Not all expenses a company incurs are tax deductible. Those that are may only qualify for a partial reduction. Some companies will need to ‘capitalize’ an expense. Capitalizing an expense refers to an expensive asset that a business invests in to generate revenue, but is also one that will depreciate over a number of years (like a building or piece of equipment). Capitalizing large expenses means only the depreciation amount of those items for that year will show up on a company’s income statement, unlike regular expenses which show the full amounts. This will allow a company to accurately assess their profits.
What Are Examples of Business Expenses?
Here are some common business expense examples that may be partially or fully tax deductible:
- Payroll (employees and freelance help)
- Bank fees and interest
- Rent
- Utilities
- Insurance
- Company car
- Equipment or Equipment rental
- Software
- Furniture
- Supplies
- Membership dues (including union or other professional affiliations)
- Commissions & Fees
- Meals
- Travel
- Employee retirement plans
- Employee education plans
- Employee benefit programs
- Subscriptions
- Equipment rentals
- Advertising
- Office equipment
- Legal fees
- Maintenance and repair
If you operate a small business out of your home, you may be able to deduct partial expenses such as:
- Home office space (as long as this is your main place of business)
- Mortgage interest
- Security system
- Property taxes
- Maintenance, repairs or upkeep
- Business Phone line (separate from home line)
- Insurance
Can Business Expenses Be Carried Forward?
Typically, a company’s financial expenses must be declared in the tax year the purchases were made. If the expenses missed were considerable and affected a company’s taxes, the company could then choose to file an amended tax return. This must be done within 3 years.
In addition, expenses that are considered to be capitalized costs (see above) will be carried forward, but the depreciation amounts will change every year. This is standard for a new company with a lot of expensive start up costs.
Can I Deduct Personal Expenses for Business?
No, one cannot deduct personal expenses for a business. The only exception is if the expense is used for both personal and business reasons. In that case, one can deduct the business part.
Let’s give an example. Take John, he’s self-employed and runs his own tax consulting business. He uses his vehicle 50% of the time to visit clients in their homes or at their place of business, and 50% of the time the vehicle is used for family or pleasure. The rules allow John to deduct the business part, but to back up this claim on his taxes he needs to track mileage and the purpose of each trip, or track gas, insurance, maintenance and repairs.
What Are the Three Types of Expenses?
There are three types of expenses:
Fixed
A fixed cost is one that does not change, or changes only slightly. An example would be the monthly rent a business pays on its headquarters.
Variable
Variable expenses vary from month to month and are typically a company’s largest expense. An example of a variable expense would be payroll for a company with a large amount of freelance personnel, or overtime expenditures.
Periodic
Periodic expenses are ones that happen infrequently. They can be hard to plan for, such as money needed for an unexpected machine replacement or repair.
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