Seven Common Small Business Budget Expense Categories to Consider
Every time you pay rent for your business, order office supplies, book a business trip, or spend money on marketing and advertising, you’re incurring a business expense. If these expenditures are organized into specific business categories, you can create effective operating budgets, accurately file your taxes, and ensure that your finances are in order
To get the ball rolling and determine what categories to consider, it is essential to understand what a business expense category is, the three major types of expenses, and to also review guidelines from the Internal Revenue Service (IRS). We will cover all of the above and more in this post with the ultimate goal of explaining key criteria to think about for your budget expense categories.
What is a Business Expense Category
A business expense category (or budget category) is a systematic way of grouping expenses for tax reporting and budget planning purposes. While the IRS doesn’t dictate all possible deductions a business can make, it does provide two requirements.
The first requirement is for the expense to be incurred in a trade or business–think a business lunch, mileage accumulated going to-and-from a meeting, travel expenses such as flights and lodging, office rent, or necessary supplies.
The second is that the expense is ordinary and necessary. As highlighted by the IRS, “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Seven Common Small Business Budget Categories to Consider
Now, we understand that different industries will likely have different expense categories.
For instance, a financial services company likely will not be purchasing large quantities of medical supplies. And healthcare firms likely will not need lawn equipment. However, there are many expense categories that are likely to fall under any industry or business type.
A set category for your office space and any other business locations such as equipment yards–whether you rent or own is necessary as the interest on your rent or mortgage payments can likely be deducted on your taxes.
Internet, cellphones, electricity, gas, water, and even trash service should all fall under their own category. If you’re paying for internet and telecom for remote employees, you may want to have this as a separate category rather than lumping it under the broader utilities umbrella.
Anything you pay your team (full-time employees and contractors), including wages, bonuses and commission. We recommend bucketing payroll taxes into their own category.
If you provide health insurance for your workers, be sure to document any premiums that you pay. Further, any company contributions toward retirement plans, like a company 401(k) should be documented.
Meals and Travel Expenses
Expenses related to meals and travel fall under close scrutiny from the IRS. If you are going to deduct spend in this category, ensure you have accurate records and appropriate receipts and documentation.
Office Supplies and Equipment
Almost every business spends money on office supplies–folders, paper, printer ink, pens, paper clips, trashbags, you name it. Track all of these purchases to ensure nothing is missed.
As a business owner, you can deduct costs associated with keeping your team current with industry best practices and enhancing skill sets. Some areas that can fall under this category including costs associated with training, conferences, and career development workshops or certifications.
This list is by no means exhaustive of all potential expense categories for your business. Other categories to consider include professional fees, memberships, licenses and permits, website expenses, and furniture and equipment.
Budget categories should be tracked in excel budget spreadsheet or your accounting software. If you unsure which categories to focus on for your business, you will need to gather financial statements from the previous year to identify frequently occurring or expected expenses. Good categorization will allow your finance team to review actual spend against your business plan and financial goals.
In addition to accurately tracking your bottom line and forecasting your budgets for bookkeeping, one of the biggest business benefits of categorizing your spending is when it comes to your taxes. In this section we will review various expense types, what can be written off, and considerations for startups.
What are the Three Major Types of Expenses?
From an accounting perspective, there are three major types of expenses–Fixed, Variable, and Periodic.
Fixed Expenses: Fixed expenses remain static for long periods of time. Examples include vehicle lease payments or rent on office space.
Variable Expenses: Expenses such as utility bills, meals, and marketing costs that change from month-to-month are considered variable costs.
Periodic Expenses: Periodic expenses are typically unexpected costs and can include spend on items such as car repairs or an unexpected business trip.
What Can I Write Off for Business Expenses?
As we mentioned above, the IRS outlines that for a business expense to be tax deductible, it needs to be “ordinary and necessary”. It is imperative to properly categorize your expenses so that when it comes to tax time, you aren’t leaving any write-offs or partial tax breaks on the table.
What Can’t Be Written Off as a Business Expense?
Unfortunately, not everything can be written off as a business expense. For instance, if you work from home, personal living expenses can’t be deducted. However, if your business is in your home, certain expenses related to utilities, mortgage interest, and insurance may be tax deductible.
Can You Deduct Job Expenses?
Yes, if they fall under an ordinary or necessary business expense.
Can I Write Off Business Startup Costs?
In some scenarios, a small business can write off costs associated with establishing the new business. However, this is dependent upon the size of the business and how much is spent. For instance, staff training, incorporation fees, and market research/product analysis can be deducted from your taxes in most cases.
A well-planned budget plays a key role in the success of your company. A key component of planning your budget is accurately categorizing your expenses–both from a cash flow allocation perspective and for tax purposes. We hope you’ve found this post helpful.
If you have questions about how to best structure expense categories for your business, TravelBank is here to help. Get in touch.