There are several types of expenses relevant to small business, it is important for any business owner to fully understand the differences among them. Nearly every type of expense reduces a business profit, but classifying those expenses and depositing correctly can lessen your tax liability.
As a business owner, many of these expenses can be deducted from your personal income taxes on schedule. Cost of goods sold expenses are not deductible, but directly reduce gross receipts into your gross profits.
Capital expenses cannot be deducted either, they are costs that become the assets of your business. Personal expenses generally cannot be deducted, unless some portion of the expense is used for business purposes. There are also several other categories of business expenses, most of which can be deducted from corporate or business taxes.
Before we continue let me quickly show you how you can classify your business expenses.
Salaries and Wages: This comprises of Salaries for permanent staff, temporary staff, part-time staff, members on boards and others.
Bonus and Income Supplement: This includes bonuses for permanent staff, temporary staff, part-time staff, members on boards, etc.
Social Security Contributions (SSC): These are SSC for part-time staff, temporary staff, permanent staff, and members on boards.
Allowances: It includes allowances for temporary staff, permanent staff, part-time staff, members on boards and others.
Overtime: It includes overtime for permanent staff, temporary staff, part-time staff, members on boards.
Utilities: This includes; fuel non-transport, lubricants, electricity, water, communication, equipment rental, telephone services etc.
Mobile Materials And Supplies: It includes; Materials and supplies, cleaning materials and supplies, uniforms, sundry materials and supplies, spare parts, protective clothing, etc.
Repair and Upkeep: This includes repair and upkeep for public property, private property, property, plant and equipment, sundry repairs and many more.
Rent: This includes; rent of property, land, buildings, government property, charges on government property, temporary charges on government property.
International Memberships: This includes UN organizations, European organizations, participation fees, organization of international meetings.
Office Services: couriers, postage, documentation, printing, and IT consumables.
Transport: hire of self-drive cars, fuel, use of personal vehicles, transportation of goods, maintenance of vehicles, etc.
Travel: It includes: overseas tickets, V.I.P treatment, overseas subsistence, and accommodation, etc.
Information Services: It comprises of advertising, production of publication, sponsorships, supplements, etc.
Contractual Services: lease of equipment, insurance cover, cleaning service, experts, commission to agents and studies and consultation.
Professional Services: They are management and operations services, medical services, accountancy services, legal services, engineering services and many more.
Training: it includes: course subsidies to employees, courses fees, etc.
Hospitality: Visit by foreign dignitaries and conference expenses.
These are business expenses and as a business owner, knowing how to classify them will lessen your tax liability.
Most people need to drive a car while conducting business. business-related automobile mileage is tax-deductible, except commuting to and from work. Any other mileage from the place of business to another location can be considered a business expense as long as the travel was made for business purposes.
Business expenses that can be deducted must be both ordinary and necessary, according to the IRS. Ordinary expenses are defined as those that are common and accepted in your particular business. Necessary expenses are those considered helpful and appropriate for your particular business. Thus, the IRS provides a pretty wide berth for what is considered an acceptable business expense.
If you are ever unsure about a specific expense, look for a legitimate business purpose for spending the money. If you can come up with a convincing argument that the expense is ordinary and necessary, write it down on the receipt or in the file in case you’re ever asked about it later on.
Any business that purchases a product for resale or manufactures product will need to figure an accurate cost of goods sold. Cost of goods sold is deducted from gross receipts to find gross profit. That is, the gross profit is before business expenses are deducted is equal to your total sales minus the total cost of the product sold. It is important to keep the cost of goods sold expenses and business expenses separate. For instance, the cost of goods sold includes the cost of raw materials, including freight charges, cost of storage, cost of direct labor, including pension contributions for any employees who work to produce the product. And lastly, the costs of running any manufacturing overhead.
These expenses are related only to gross profit and cannot be deducted again with the business expenses. Be sure your accounting system is set up to correctly classify the cost of goods sold expenses and business expenses. Having said that, capital expenses include start-up costs, asset costs, and any improvement costs. Rather than deducting these expenses, they are capitalized, thus becoming assets of the business. Personal expenses, such as home or family expenses, generally are not deductible, unless the expenditure is in some part used for the business. In these cases, the expenses are divided into personal and business percentage, and the amount equal to the business percentage can be deducted. The same method applies to deductions for use of your home or car for business purposes.. the percentage of use for each must be calculated, and only the amount used specifically for business can be deducted. Reasonable travel and entertainment costs are tax-deductible if they are: Direct related to business, meaning that business tool place or was discussed during the entertainment associated with business, meaning that business took place or was discussed immediately before or after the entertainment. That is a small business owner took a client out to dinner or a sporting event following a meeting.
In conclusion, other common expenses that can be deducted from your business taxes include employee salaries, the cost of leased space for the business, interest on loans, insurance costs, and any taxes paid on the local, state, or federal level. Generally, these are all included under the basic definition of business expenses. Of course, I said earlier there are other legitimate and deductible business expenses. Knowing how to classify your expenses would lessen your tax liability. As a business owner, you need to know how to classify your expenses and know the numbers inside and out, how to keep your accounting system accurate, and how each type of expense affects your tax. Even though I’m not a tax accountant and I don’t file taxes, I’m here to make sure you’ve successfully set up for the least amount of tax liability possible.
Do you need any assistant on how you can lessen your tax liability? At Business Solutions Plus, we help businesses that need to lessen their tax liability.