Businesses Expenses That Are Tax Deductible

Every business owner should be able to withstand expenses and taxes. The independent business operators go out of their own means to make their jobs trouble-free. Similarly, businesses that merge also strive to minimize their expenses that reduce business tax. For sole entrepreneurs, a deduction on expenses reduces the self-employment tax and regular income tax. Working to minimize your business expenses will lead to a reduction of tax liabilities.

What is a Legitimate Expense?

Ideally, a legitimate expense is an expense that is ordinary and necessary in your job or line of work. The tax code (Internal Revenue Code section 162) provides the definition for the legitimate expense. According to IRS Publication 535, an ordinary expense is one that is regular and has acceptance in a given industry. An expense is supportive and appropriate usage of monetary resources for your job or business.

Expert indicates that there are five distinct types of expenses for a business. Personal expenses are different from business expenses. We classify the business expenses into three expansive categories. They include the costs of goods sold, capital expenditures, and deductible expenditures. Some expenses may be deductible or non-deductible.

The five distinct types of expenses for business include:

• Personal expenses

• Business expenses

• Cost of goods sold

• Capital expenses

• Deductible expenses

Separating Personal Expenses

As an entrepreneur, you should be able to separate personal expenses from business expenses. Consequently, this will go a long way in ensuring there is no confusion whatsoever the case. A regular example is a person using a single room in his or her house as an office. Such a situation requires you to measure the footage of the office and that of the whole house. Then you make calculations expressing them in terms of percentage. With the percentage, you can easily determine the business portion of the expenses that are in use in the house. The expenses you share include rent, insurance, and utilities. Henceforth, the business portions of these expenses become home office deduction. The rest of the expenses will be personal in nature.

A general rule of dealing with expenses states that you cannot deduct personal or family expenses for taxation purposes. Moreover, it is essential to divide the costs if you have an expense for something that has multiple uses. The item could be partly useful for business or personal purposes. Therefore, dividing the costs between the business and personal parts will be beneficial. The business part is deductible according to the IRS Publication 535, the section on personal versus business expenses. Keeping track of your expenses is a crucial bookkeeping tip. This implies that you can easily review your expenses and inquire from your accountant if any of them is tax-deductible.

Cost of Goods Sold

These are the expenses for all items related to inventory. Manufacturers, wholesalers, and retailers are alert in tracking business transactions. They ensure that the costs of products they produce or purchase for resale are keenly monitored. Notably, the general rule for cost of goods sold indicates that one must value inventory at the beginning and end of each tax time to figure your cost of goods sold. That is if the business manufactures products or purchases them for resale, you generally must. According to IRS Publication 535, the section on cost of goods sold, some of businesses expenses are useful in the determination of costs.

Capital Expenses

At the time of recording business transactions, some assets are put down in writing and we recover their costs over time through depreciation. We capitalize the costs of expenses as assets of the business. The costs go through a deduction over a period by depreciation. Examples of capital expenses include real estate, computers, furniture, and equipment. Essentially, the general rule for capital expenses highlights that one must capitalize on three types of costs. These are business start-up costs, business assets, and improvements.

Keeping a Record of Business Expenses

As a business owner, you should keep track of all the business expenses. Excellent accounting software is the finest in tracking your income and expenses. QuickBooks or Sage Peachtree will assist you to monitor your business financial health in the long run.

To make your tax preparation simple and efficient, it is advisable you spend time ensuring your expense categories are put up correctly. You can make any rectifications necessary from adding to deleting categories in all accounting software and personal finance. To generate meaningful reports, your categories must be intuitive and simple to remember. Most programs will allow you to link categories to specific line items on tax forms.

The accounting programs can easily generate Income statements or profit and loss reports. Income statements assist you to make an analysis of how your freelance business is progressing. You will know if your business is profitable and how you spend your money. When you decide to employ a tax accountant, the income statements will advance the preparation of your tax returns.

Get in touch with us to expert advice on business expenses that are tax deductable. Our experts will be willing to give you outstanding suggestions that will help you reduce the amount you pay as tax.  

More from Mount Bonnell Advisors:

Equipment Financing Options for Small Businesses in the US
Crowdfunding