Business Expenses: The Basics
I know you have heard the saying, “You have to spend money to make money,” but do you really understand how spending money impacts your business?
The IRS definition of a business expense is “the cost of carrying on a trade or business.” That definition is very broad and can encompass so many different things. To simplify it, a business expense is any money you spend in or on your business. When you are analyzing your business, your business expenses are deducted from your business revenue and the result is your net taxable income (or net profit).
Some expenses will seem very obvious, like money spent on Facebook or Instagram ads, others, maybe not so obvious, such as a portion of your monthly cell phone or home internet bill. Most business expenses are fully deductible on your tax return however there are some expenses that are partially or completely not deductible.
Common business expenses that are generally fully tax-deductible include:
Office supplies
Bank + payment processor fees
Legal expenses
Tax preparation costs
Payments to virtual assistants, social media managers, and online business managers
Educational courses + workshops
Partially deductible expenses largely include meals and gifts. If you take a current or prospective client out to lunch or dinner, the IRS only permits a deduction of 50% of the expense on your tax return. When it comes to gifts for current or prospective clients, the deduction is limited to $25 per person/client. If you spend more than $25 on the gift, the excess is disallowed.
The IRS does have a short listing of business expenses that are completely disallowed on your tax return, those include:
Donations to political campaigns
Bribes or kickbacks
Tickets to sporting events + concerts
Memberships to country clubs or other social clubs
Many business owners try and minimize business expenditures for as long as possible so that they can keep as much of the profit as they can for themselves. It’s important to remember that when you spend money in and on your business you are reducing the amount of income that will be subject to tax at the end of the year. While I’m not advocating for you to go out and spend all of your profits on frivolous items for your business, don’t be afraid to make a few investments in your business.
Staying on top of your business financials will give you insights into your business profitability and provide you with the information you need to determine whether certain expenses are worth the investment. Don’t be afraid to invest in things like courses, software, or even a virtual assistant that will give you the ability to grow your business even more.