As a business owner, you must understand the importance of accounting and managing various expenses to keep all operations running well. It requires categorizing the costs to help appropriately plan finances, maintain good transaction records, and quickly file taxes. Therefore, it is crucial to understand the art of categorizing expenses to know what is and is not tax deductible.
This article will focus on small business expenses and ways to categorize them.
Tips for Categorizing Small Business Expenses
Although categorizing expenses in a small business may seem overwhelming, it is a necessary process that helps manage different operations. Whether you are new in business and trying to create an efficient system or a seasoned business owner who wants to change various things, there are ways you can categorize to improve operations. Here is what you can do.
Have a Separate Expense Account
It can be a good idea to have a separate account for all expenses in the business. This makes tracking the costs easier. For example, you can pay your internet, phone, and utility bills separately in the account.
Use Software and Online Apps
Another effective way of managing finances is by utilizing finance software and online apps. Tools like Prillionaires personal finance software, typically used for managing individual finances, can demonstrate the ease and efficiency of automating financial tracking. While these tools are designed for personal use, the principles they embody can be informative for small businesses looking to streamline their expense tracking and asset calculation processes.
Automating these processes, rather than manually maintaining spreadsheets, can save time and increase accuracy and productivity. Although Prillionaires is intended for personal finance, the benefits of diligent expense tracking are universal. For instance:
- Tracking expenses highlights potential tax-deductible expenses, easing tax filing.
- It provides a clear picture of financial health, indicating areas needing adjustments.
- It helps categorize and organize financial data, crucial for smooth operations.
Examples of Small Business Expenses
Categorizing the expenses in a small business makes it easy to know the tax-deductible items and filing returns. The following are the main expenses that can be tax-deductible.
Rent and Utilities
The expenses spent on rent and utilities for the business to operate are also deductible. The costs include rent, electricity and water bills, internet, telephone, storage, etc. If you work from home, you can have the cost for a mobile data plan, work desk, computer, and other expenses for tax deductions.
Taxes
Taxes related to businesses, like local and state sales tax, can be deductible. Personal property, excise, and local income taxes are also deductible in business expenses.
Compensation
The salary you pay your employees or contractors for their labor can also be a deductible expense.
Insurance
Insurance is also deductible as an expense if you buy it specifically for the business or trade. For example, tax-deductible insurance expenses include general and professional liability insurance, insurance premiums, data breach insurance, and commercial property insurance.
Vehicle Expenses
If you have vehicles in your small business, owning or operating the vehicle can also be tax deductible, precisely mileage and gas costs. Depreciation and parking fees can be considered tax deductibles.
Conclusion
These are ways to categorize small business expenses to understand what is deductible or not. So, understanding the importance of using online apps and software to organize and track business expenses.
