What Are Business Expenses
If you run a business, you know that you have to spend money to make money. These are your business expenses. They can be tough to manage, but you have to if you want to keep ahead and make profit. Fortunately, the government likes to encourage people to start businesses, so they offer tax benefits to those who do. These come in the form of write-offs for business expenses.
The IRS defines a business expense as “the costs of carrying on a trade or business … usually deductible if the business is operated to make a profit.” Knowing what counts as a business expense and what can be deducted is critical to keeping your business afloat.
Dragon Financial, a local Portland bookkeeping company to give us some helpful tips to manage your business expenses.
1. Know What Can Be Deducted
It’s important to know what can and can’t be deducted from your expenses. This is subject to change over time as congress writes new laws and modifies old ones, so you have to keep up to date. The IRS requires any business expense to be “ordinary and necessary” to be deductible.
The necessary part is obvious: if you can’t run a business without this expense, it’s necessary. Sometimes, it doesn’t need to be completely indispensable to count as necessary. If it is extremely useful to your business, it also counts. For example, as an accounting company, Dragon Financial does not NEED computers to do its work; however, computers are so useful to running this business that it counts as a necessary cost.
Ordinary is a bit more tricky. Ordinary expenses are considered common and accepted as a part of the business. This varies from one business to the next, so you will have to look some of these up. For more information on this subject, you can visit the IRS webpage on it.
2. Keep Records of Everything
Before you can deduct anything from your business expenses, you must prove that the expenses are genuine. Without proper documentation, the IRS will not accept any claims. This makes it important to keep records of everything you spend money on for your business. Receipts qualify as records, so make sure you get one for every transaction. If you can’t get a receipt, then write down the date, business reason, amount, and the vendor you purchased from so that the claim can be verified.
To help with this, you have to learn to organize. There are numerous accounting software programs to help you out. You can also hire your own accountant or assistant to keep track of it for you. Either way, keeping it organized will help you avoid skipping over things that could save you money.
3. Split Business and Personal Expenses
Sometimes, things you use for your business are also used for personal reasons. For example, you use a car to drive to your office, but you also drive it around town. If you get a computer, you’ll use it to help run your business, but you’ll also use it to look up silly cat videos on Youtube. The IRS does not allow full deduction of such expenses, and so you have to split the costs. Exactly how is up to current policy, so you’ll have to check up on this to be sure what is available.
BONUS TIP: Be Careful
The IRS is very precise about deductibles. They also don’t like people trying to make deductions that aren’t acceptable. Improperly filed taxes (including deductions) will get you fined, so you have to be sure before you apply.
Generally, if you want to deduct business expenses, it’s a good idea to hire up an accountant or virtual assistant who knows the ins and outs of tax laws. They have specialized training to file everything properly and probably know a few things you can deduct that you never would have guessed. Even if you can’t afford to have one on staff, it’s usually a valuable expense to hire an accountant to look over your records and make sure they’re good before you submit them. That way, you can be absolutely sure you’re getting everything you can and won’t be hit with fines for errors.