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Business expenses are the costs you pay to run your company. Some of these happen just once, such as the investment of buying a new vehicle lift for your auto shop. Others are consistent over time, such as electric bills and payroll.
As you run your business, it’s important to monitor your expenses so that you know whether your company is profitable, how your cash flow is doing, and whether your business is in danger of running out of cash. You can also deduct business expenses from your business taxes.
Wonder how business expenses work, exactly? Let’s take a look.
In a phrase, all of them.
Part of knowing how business expenses work is knowing your money is going. Every time money goes out of your business, you need to record it and keep an eye on trends. You can make it easier by breaking your expenses into broad categories. Then, when your start to struggle financially, you can quickly drill down to discover the problem.
If you work from home instead of from a store or corporate office, you want to track specific expenses related to having an office at your house. These include your mortgage, utilities, property taxes, home insurance, and repairs and maintenance.
You’ll be able to write off a percentage of these expenses based on the percentage of floor space your office represents in your home.
Do you use a car, van, or truck for your business? If so, you can write off some of your vehicle expenses. This includes a cost allowance if you own the vehicle, fuel, oil, maintenance, parking fees, tolls, and more.
Like your home office, your vehicle expenses can be written off on your taxes based on the percentage of use of your vehicle that is for business vs. personal use.
This is a broad category that you can break down further. For example, you might have professional services you use such as a lawyer or accountant. If you don’t work from home, you’ll have office expenses like office rent & utilities.
You may have a variety of insurance policies, such as business property insurance, liability coverage, and more. You’ll also have personnel expenses, like salaries, pension contributions, employment insurance, and other benefits.
There could also be other miscellaneous expenses, such as bad debt, collections fees, internet fees, and membership dues to industry organizations. Be sure to work with your accountant to ensure you get all the deductions that you are entitled to.
Marketing is a common business expense, but it’s often one of the largest and most important. After all, if people don’t know about you and aren’t enticed to buy your products or services, you won’t be in business long.
It’s important to remember that while you can write off marketing expenses, it’s really an investment in your business. All marketing expenditures should have a positive return on investment — that is, they should bring in more than they cost.
Some of the most cost-effective marketing strategies are search engine optimization (SEO) and other forms of digital outreach. They cost far less than traditional marketing and reach a more targeted group of people.
A final category of expenses is capital depreciation. When you make a major purchase, you don’t claim the full cost during the year you make the expenditure. Instead, you spread it out over the lifetime of the equipment.
For example, you can take a small percentage a year for a building you own, while software purchases are spread only across two years. Knowing how to spread the cost of a major asset over time can help you keep your financial documents from swinging wildly from one year to the next.
Now that you know how business expenses work, let’s talk about why they’re important.
As we mentioned in many of the categories above, the expenses you have for your business are tax-deductible. These deductions reduce the amount of your business income that is taxable and also help you understand if you’re turning a profit.
Keep in mind that these deductions only apply to your company’s income taxes, not your own personal income — unless you’re a sole proprietor. For a sole proprietorship, the business income and your income are the same, so the deductions would apply to your income.
Also, tracking your expenses helps you understand how healthy your company is financially. This is often a major determinant of success for business owners. Are you bringing in more income than you’re spending? Is your profit margin growing from year to year?
If you’re taking losses each year, you’re using up your capital reserve. If it doesn’t change, you risk going out of business. That’s why it’s so important to track your expenses and take action if they get too large!
As we mentioned earlier, excellent marketing isn’t really an expense, although you can write it off. It’s really an investment in the future of your company.
If you’re curious how SEO and digital marketing can help your business grow, let us show you! Simply contact us today for a free consultation.
Disclaimer: This article does not constitute financial advice. Please consult an accountant or financial professional before making any significant financial decisions or completing tax returns.