Business Expenses to Watch Out for Each Month
to track as a small business owner, the burden falls on you to track and record all transactions relating to your business. Keeping track of customers, employees, and vendors can easily become overwhelming, not to mention remembering to record a $20 office supply run or a $15 business meal.
However, the expenses you record directly impact your taxable income. The more qualifying business expense you can take, the lower your tax bill will be, making it vital to understand which business expense to watch out for each month.
The first expense category that business owners neglect to record is travel. Travel from your office to client locations or out of state for seminars and meetings is qualifying travel. Many business owners forget to record these expenses, especially if they work personal activities into business travel.
According to IRS Topic No. 511, travel expenses that are ordinary and necessary are fully deductible, assuming the costs aren’t lavish or extravagant. Hotels, airfare, rental cars, cleaning, meals, and any other expenses that are involved with the trip can be fully deductible on your tax return. If you mix a business and personal trip, only the portion that is attributable to the business aspect is deductible.
For the tax year 2022, meals at qualifying restaurants are fully deductible. Starting January 1, 2023, the deductibility reverts back down to 50%. This means that bringing in donuts for your employees or catering a Christmas party is fully deductible. Even spending $5 at your local Starbucks picking up a coffee qualifies.
Not only do employee meals give way to a deduction, but business meetings with current or prospective clients also qualify. Taking a new client out to lunch to go over your services or having cupcakes sent to their office gives your business the ability to write off the entire amount for both financial and tax purposes, reducing your tax liability.
Many small business owners have their business policies worked into personal policies, such as their home or auto policies. The portion you pay for your business insurance is a qualifying expense, meaning if you don’t take the time to break out the costs, you can overstate taxable income.
Your insurance agent should be able to identify premiums associated with your business liability policy package or you may be able to tell based on the annual documents you receive. In addition, business owners who use a personal car for business travel or have a home office may be able to take a portion of the home and auto policies as a business deduction as well.
Any material or supply that you purchase for your business is a qualifying business expense. This means a pack of sticky notes or new pens should be listed on your tax return as an office expense. Publication 535 outlines that the expense must be ordinary and necessary to be a business expense. Due to the broadness of these guidelines, most office items that you purchase or plan to use in your business will be a qualifying deduction.
Similar to insurance, your small business might have utilities that are on a personal statement. It’s important to separate business versus personal utilities to lower your taxable income. When you take the home office deduction, you may be able to take a flat portion of utilities; however, if you have a designated warehouse or space on your bill, you will want to separate out those expenses.
Waiting until year-end to determine your utility expense not only gives you minimal insight into your monthly cash flow but can also lead to missing amounts. If you operate in a separate space from your personal utility bill, you can use the business bill to determine your expense. Additionally, pay any business utility amounts out of the business bank account to ensure the costs don’t get missed.
Dues and Subscriptions
Dues and subscriptions are other areas that many business owners neglect. A subscription of $10 or $20 can easily be overlooked, but these amounts can add up to reduce your taxable income. Do you have a magazine subscription for your office? How about are you subscribed to a business journal? These amounts are qualifying business expenses that you will want to watch out for each month.
The dates that payroll taxes are due depend on your filing frequency and business size. This means that you may be required to remit amounts every two weeks, monthly, and sometimes quarterly. Even if your business doesn’t have any employees, you may still be paying yourself a salary. In these cases, you will still need to withhold both employer and employee payroll taxes.
Payroll taxes should be recorded in the period the payroll expense occurs, not when it is paid. This means you might have a payroll accrual on the books each month to follow GAAP. For the specifics of payroll taxes based on your accounting method, reach out to an accountant.
Inventory is another crucial area where expenses can easily be misstated. For businesses that don’t rely on inventory, this section won’t be as applicable. Nevertheless, business owners need to be sure they are recording inventory based on the proper product cost. The price of inventory frequently changes, meaning the inventory you purchased last week might not have the same unit cost as an inventory order this week. Properly identifying goods with the corresponding costs is crucial to record the correct amount of cost of goods sold.
Properly recording and understanding the financial statements relies on implementing the necessary safeguards to catch all qualifying business expenses. The costs of your business records will be specific to your company, making it important to contact an expert, like Bookkeepme.
The team at Bookkeepme can help you navigate which costs your business should be watching for each month to ensure completeness and accuracy in your accounting function. Reach out today to learn more.
IRS. “Publication 535.” IRS, 29 Sep 2022, https://www.irs.gov/publications/p535.Accessed 22 Nov 2022.
IRS. “Topic No. 511 Business Travel Expenses.” IRS,6 Oct 2022, https://www.irs.gov/taxtopics/tc511.Accessed 22 Nov 2022.