Business Expenses 101: Everything You Need To Know
Financial Management & Accounting

Business Expenses 101: Everything You Need To Know About Business Expenses

Elorus Team
Elorus Team

Being a freelancer means having a lot of fun on interesting projects. It also means that there are dull things that you need to do every now and then, one of them being your tax reports. A critical part of your tax report is the business expenses section; it determines whether you’ll get a tax return or you’ll owe to the state. Hence, being aware of what your company expenses are and how you can use them to your benefit is important.

Figuring out what things you can actually claim on taxes as business expenses can be confusing at first. Yet, once you get the hang of it, you’ll be able to distinguish them immediately and avoid mistakes that will cost you in the future.

Keep reading and find out all you need to assist you in keeping track of business expenses. Find out which of these expenses you can deduct from your income and can write them off from your taxes.

Common Allowable and Qualified business expense Tax Deductions for Self–Employed and Small Businesses.

So, what makes an expense eligible to be considered as “business”? It is quite simple. Company expenses are the costs you pay to carry out your trade.

Whatever you spend money on to keep your business going and growing is considered a business expense.

However, some expenses are less obvious than others or depend on the trade of your business. For example, your company’s electricity bill is a common business expense. Claiming a business travel expense deduction is also quite established. But did you know that yours and your employees’ retirement plans are qualified as business expenses too? No? You might want to keep on reading…

Company expenses are deductible for tax purposes

According to the IRS “deductibles are the expenses that are both ordinary and necessary”. Though this may be a little vague you can look it up every time you are having doubts about claiming an expense. For example, buying a foot massage device can only be deductible if you are a beauty professional. There is no deduction if you are a lawyer that enjoys the casual foot massage, so you get the point. It’s important to claim only the deductible expenses in your tax reports to avoid penalties.

It is important to separate business expenses from the following expenses:

  1. The expenses used to figure the cost of goods sold
  2. Capital Expenses, and
  3. Personal Expenses

Keeping track of Business Expenses

Once you’ve identified your business expenses, deductible or not, you need to keep track of them. This is not only necessary for your tax report but for your own knowledge as well. Now tracking them down is a tricky business if you’re not adequately organized. Excel files and scattered receipts just won’t do.

Small business or not, using a cloud invoicing software that provides expense tracking features, like Elorus, you get to monitor how much you spend and make decisions to further improve your company’s performance. And you can do it quickly and easily with a full daily, monthly, or yearly expense report.

Maybe you’ll discover you need to cut back on expenses or that your firm is going well and you need to invest money in new equipment. Elorus helps you monitor your cash flow, whose picture is partially dependable on expenses (the other half is comprised of your revenues).

Keeping your records up-to-date

Once you’ve got yourself a system to keep your expenses tidy, you have to keep that system updated. You don’t need extra personnel to do that job, you just have to be consistent and set a time every day when you’re going to sort out your receipts and run a check on your bank accounts for amounts paid for business expenses.

Running a business involves a lot of, well-running errands, so you find yourself with limited time to manage your receipts. If you have recurring expenses, Elorus can help you a lot with that. You can set up your recurring expenses (i.e. subscriptions, website hosting services, rent) once and Elorus will pick up from there. It will send you reminders every time you need to make a payment and will automatically create expense records for you.

Some personal expenses can be business too

Well, not entirely…

You can divide an expense you made that was partly used for business and partly for personal purposes, and deduct the business part in your tax report.

For example, let’s say that you borrow money and spend 80% of it on your business equipment and 20% on renovating your house. You will be able to deduct 80% of the interest as a business expense.

Always consult an expert

It’s very important to hire an expert to check and file those reports for you. Elorus is a powerful tool in your hands, but it cannot replace an accountant that has years of experience.

Their contribution is significant not only in tax reports but in giving you valuable advice.

Though this may be an additional business expense, it’s deductible! For even more effective collaboration, you can invite them to your Elorus account and save you both time and money!

Other Types of Ordinary Qualified Business Expenses

  • Employees’ Payroll – Deduction is generally applied to the salaries you give your employees for their services at your business.
  • Retirement Plans – Yours and your employees.
  • Rent Expense – You can deduct rent as an expense only if you use the property to house your trade or business.
  • Interest – Business interest expense is an amount charged for the use of the money you borrowed for business activities and is deductible too.
  • Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance – Generally, you can deduct the cost of insurance as a business expense, if it is for your trade, business, or profession.