Guide to Classifying Business Expenses
March 9, 2017
When you’re a business owner, keeping track of all your business expenses can be complicated. You want to classify your business expenses correctly, so you can take advantage of any deductions for small-business owners and avoid basic accounting problems so audit risk is minimized. Here are some tips for classifying business expenses to help you avoid the types of errors in financial accounting that commonly lead to lost deductions or problems down the road.
Business Expenses vs. Pleasure Expenses
Just because you spend money during the workday doesn’t automatically make it a business expense, and assuming all expenses during business hours are deductible is one of those types of accounting errors that can land you in hot water with the IRS. If you take a client out to dinner, that’s a business expense. If you order takeout while working late one night, that is not. Ordering takeout for your employees who are working overtime can be considered a business expense, however.
You can avoid making a mistake here by making sure not to put any personal expenses on the business credit card. Before you whip out that company card, figure out whether you are about to incur a business expense or a personal one. Also, you can only take a deduction once. Taking a client out to dinner is either an entertainment or a travel expense, not both. Keep organized records and know how you are going to classify each business expense in advance to reduce your small business’s audit risk exposure.
Tracking Reimbursable Expenses
If you’re paying for certain business expenses out of pocket that you are supposed to be reimbursed for, these may still be business deductions. Be sure you get reimbursed and get the applicable deductions you are entitled to.
Knowing the Basics
You should have a sense of some of the basic deductions for small-business owners that are available. These can include:
- Advertising: Money you spend on marketing your business, like printing fliers or placing an ad on a website, can be tax-deductible.
- Insurance: Premiums for insurance policies that the IRS deems ordinary and necessary are tax-deductible. This category usually includes theft insurance, fire insurance and liability insurance, as well as health insurance for employees in some cases.
- Maintenance: You may deduct the cost of cleaning work areas and repairing work equipment.
- Meals and Entertainment: Only when used specifically to engage customers, clients or employees in business activities.
- Office Supplies: For nondepreciating items like paper and file folders.
- Depreciation: You can’t declare office items that depreciate like computers and copy machines, but you can calculate the cost of their depreciation each year and declare that as tax-deductible losses.
- Rent: Including office space, storage space and retail space. If you’re paying rent on property that you use solely to conduct business, you can deduct it.
- Taxes: You can deduct local business and business property taxes on your federal return.
- Training: The costs of training employees, like books, computer programs and seminars, are usually tax-deductible.
- Travel and Transportation Expenses: Travel costs incurred while traveling for business are deductible. This includes mileage and other costs related to driving, as well as the costs of plane tickets and hotel accommodations when traveling far from your home base for business.
- Utilities: Including electricity, telephone service and internet service.
Claiming Too Many Expenses
If you’re concerned about small-business audit risk, you should be aware that the main thing that’s likely to trigger an audit is claiming too many expenses. How to avoid this? First, be aware that the three items the IRS reviews the most are car expenses, travel and entertainment expenses, and home office deductions. Some of these may not apply to you. For those that do, however, it’s important to keep an eye on how much you are spending, and to make sure all the expenditures you claim are legitimate business expenses.
This does not mean you need to put any kind of cap on how much you spend on, for example, travel and entertainment, providing you limit the amount you claim to what is allowed, but it does mean you should be prepared for a visit from the IRS if those numbers are uncommonly high. Being prepared doesn’t mean crossing your fingers and hoping it doesn’t happen. It means making sure every one of those expenses is scrupulously documented, with clear evidence as to where, when and why the listed expenditure took place.
Managing Payroll Taxes
Another area where you may be concerned about audit risk is payroll taxes. Payroll taxes can be complicated and it’s easy to make a mistake. It’s also easy to avoid a mistake by letting a professional handle all your payroll. BCM Payroll Services Inc. does just that for small businesses in the southcentral Pennsylvania and western Maryland areas. We handle as much of the payroll as you desire and take responsibility for filing all the necessary tax information with the IRS so you have one less thing to worry about. For more information, contact BCM for a free quote today.