how to categorize expenses for small business 5

How to Categorize Your Business Expenses Bench Accounting

Sustainability certifications are an indispensable tool for small businesses. Planning for the unexpected can save your business down the line. This category covers systems and tools that help you bounce back quickly from disruptions.

Payroll and Salary Costs

Taking advantage of every tax-deductible expense will increase your business’s cash flow and make it easier to operate. Automating the reconciliation of your expenses is the best way to ensure you get every deduction available. In addition to your business checking account, consider opening a business savings account to set aside funds for taxes, emergencies, or future investments. It’s a simple way to stay financially prepared and build a financial cushion as your business grows.

Accounting Services

Making your physical or digital spaces more accessible isn’t just the right thing to do; it’s good business. Market research helps businesses stay competitive, relevant, and ready for what’s next. In today’s digital world, protecting sensitive data is critical. Cybersecurity expenses can help prevent breaches, fines, and reputational damage.

• Advertising and marketing are tried-and-true ways for businesses to expand their customer base and boost sales.
• These categories typically include operating expenses, capital expenses, cost of goods sold, administrative expenses, and marketing expenses.
• Keeping these costs in check is essential for budget management.
• Instead, open a separate business bank account and only use it for business transactions.
• Include any costs you incur to operate your office, including website hosting and software necessary to run your business.

Enerpize generates detailed financial reports that break down expenses by category. These reports can be used to analyze where money is being spent, allowing businesses to identify areas for cost-cutting or investment. Regularly reviewing expense reports also helps improve financial planning and forecasting. Expense categories are important for more than just financial management. For example, you can use them to generate reports, which can inform strategic planning and investment decisions.

Rent or Mortgage Payments

By keeping detailed records, small businesses can better allocate such expenses, ensuring they meet the requirements for tax-deductible expenses and optimizing their business deductions. Space costs money, whether you’re leasing an office, a storefront, or a warehouse. Running a business often entails various bank-related costs, from account maintenance fees to transaction charges. Set up a company credit card to easily discern personal vs. business-related spending and any corresponding fees. Business expense categories help companies organize and track their spending. These categories typically include operating expenses, capital expenses, cost of goods sold, administrative expenses, and marketing expenses.

Well-organized expense categories also simplify the tax preparation process. First, identify and list all your business expenses, such as office supplies, travel expenses, and other deductible business expenses. Create a comprehensive list that includes recurring costs and one-time purchases. This might mean reviewing bank statements, business receipts, and invoices. Common tax-deductible business expenses include licensing costs, loan interest, depreciating assets, and wages.

To get started, let’s review the essentials, beginning with types of expenses. You can categorize the premiums you pay for general liability, professional indemnity, and other types of insurance here. You can categorize money you spend to market and promote your business. Use this for online and offline advertising, sponsorships, public relations, and similar fees. You can categorize expenses on computers, laptops, mobile phones, printers, and other equipment you use in the course of work. The New Markets Tax Credit is a federal tax credit available to investors who invest in businesses and projects located in low-income communities.

These expenses must be both ordinary (common and accepted in the business’s industry) and necessary (helpful and appropriate for the business). Examples include rent, salaries, utilities, and office supplies, among others. Any taxes paid to your state or your local government can be claimed as a business deduction. These types of business expenses often need more scrutiny, especially by small business owners, as there can be quite a variance from month to month. The more tax-deductible expenses you have, the lower your taxable income will be, and the more cash flow you’ll have to reinvest into your small business. If you’re outsourcing work—like hiring graphic designers, SEO specialists, or web developers to fulfill client contracts—these costs are likely direct expenses.

• Such routines ensure that the categorization process evolves with the business and continues to serve its financial strategy.
• These expenses may also refer to deductions for businesses and self-employed individuals when filing tax returns.
• It allows for accurate tracking of expenditures and aids in identifying areas for cost-saving.
• Space costs money, whether you’re leasing an office, a storefront, or a warehouse.

Tracking and Organizing Receipts

Efficient receipt tracking is essential for maintaining accurate records and ensuring compliance. The IRS requires businesses to substantiate deductions with proper documentation, making a reliable system crucial. Digital tools, such as receipt scanning apps, can convert physical receipts into searchable, backed-up digital files.

Examples of Common Small Business Expense Categories

Don’t forget your utilities, phone, and any real estate taxes you pay on your building. Employee salaries and wages for staff are typically one of the largest business expense categories for most companies. You’ll want to see how much it’s costing your company just to manage it, which can help you develop cost-saving strategies for the future. Personal expenses should be classified into clear categories such how to categorize expenses for small business as housing, food, transportation, healthcare, entertainment, and savings. Such categorization helps individuals track spending and manage their finances effectively.

Millions of companies use Square to take payments, manage staff, and conduct business in-store and online. Use this category for making payments into a business retirement plan, like a 401(K). For people in retail, you might have inventory management software or a point-of-sales system to pay for.

How can you tell if something is tax deductible?

You will want to define your own categories for any spending that falls outside what we’ve listed above. If you pay money to an accountant, lawyer, or other professional, include them here. You might also include membership fees for professional associations or publications. You can expense money you spend to keep your workplace in good order. This might include repainting, replacing lightbulbs, cleaning, repairing equipment, and other similar expenses.