Starting a business comes with a huge responsibilities. One thing you have to do to keep your company organized and managed properly is categorize your business expenses. Particularly with a small business, you have to keep track of where every penny is going. Doing so will help you budget your business costs, build savings, meet revenue goals, and determine which expenses are tax-deductible. Here are four tips for how to categorize expenses for a small business.
1. Identify Your Startup Business Costs
Setting up a small business comes with a lot of expense. To keep these costs organized and under control, you'll want to not only keep a total of your expenditures but you'll also want to group them by type. Startup business costs typically fall under one of two categories: recurring expenses and one-time expenses.
Generally, your one-time expenses are those you used to start your business, such as for permits, furniture, equipment, licenses, and fees. Your recurring expenses, on the other hand, are those you are probably going to be paying on a monthly basis, such as rent, utilities, and employee salaries.
2. Separate Business Expenses Into Categories
Now that you've identified your startup business costs, you can put them into more specific categories. This will help you budget and take advantage of as many tax deductions as possible. Your list of expenses for small business might include:
- Wages paid to employees: This includes any type of compensation, such as salary and commission bonuses, you pay your employees.
- Fees: These fees include those you pay to the bank to open and manage bank accounts, credit cards, and loans. You might also have to pay fees for licenses and professional services such as accounting, legal, and consulting.
- Advertising: You will likely incur marketing and advertising expenses to make sure people see and hear about your business. Examples of advertising materials include business cards, brochures, and website development and maintenance.
- Insurance: List annual premiums paid on any insurance policies for your business, including auto, malpractice, liability, and property.
- Clothing: This includes apparel used for your business, such as uniforms or protective gear while performing a job; it does not include personal clothes.
- Communication: These expenses are those that enable you to communicate with others at work and include internet, business phone, and cell phone fees.
- Education: You might pay for your employees to participate in or attend seminars, take training courses, and have the educational resources to continue their professional development.
- Equipment: Any business tools or machinery purchases.
- Gifts: If you have given any business contacts gifts, consider these an expense to your business.
- Employee benefits: If your business provides benefits such as accident and health plans, life insurance, adoption assistance, etc., then include the expenses paid to have these.
- Rent/Lease payments: The payments made to rent your office location, equipment, warehouse, and vehicles — basically, anything you do not own but you make payments on to use for business purposes.
- Travel, meals, and entertainment: If you or your employees travel for business or take clients, customers, or employees out for dinner or entertainment, categorize the expenses they incur as business expenses.
- Repairs: Any payments made to fix something in your office, such as a plumbing leak or broken printer, is considered a repair expense.
- Supplies/Materials: Supplies and office materials such as printer paper, pens, pencils, books, and cleaning supplies.
- Utilities: Payments made for your company to have electricity, gas, and cable are also business expenses.
- Depreciation: Account for how much value assets such as equipment, machines, and furniture have lost over time.
3. Research Which Expenses You Can Deduct for Tax Purposes
Take this extensive list of business expenses and find out which ones you can deduct for tax purposes. Claiming deductions can save you and your company significant money. It reduces your taxable income and allows you to pay less in taxes. An accurate tally of total expenditures that can be deducted from business revenue helps you determine your taxable income.
Some business expenses you can deduct fully and some only partially. Fortunately, you can deduct many of the expenses listed above in full. However, there are some expenses that can never be deducted. For example, you can't write off any personal expenses, such as interest paid on a personal credit card and mileage driven for taking kids to school, as business expenses.
4. Create a System for Tracking Your Expenses
Now that you know the types of expenses your business incurs, you need to create a system to keep track of them. You can, for instance, organize your income and expenses into an easily updated computer spreadsheet. Simply create a file for each month listing your expenses and categorizing them by their department. This spreadsheet can also help you with budgeting if you choose to list your income, as well.
At the end of the calendar year, add columns for budgeted, total, average, and projected expenses. In the budgeted columns, plug in what you had budgeted for each expense. In the total column, list what your expenses actually were for the year. Next, you can add your monthly average expenses to the average column. Now multiply your average monthly expenses by 12 to determine your projected expenses at your business's current position.
Keep backup records of all of your invoices, bills, receipts, and statements. If your company gets audited, the IRS asks any questions for tax purposes, or a system malfunctions, you can support your spreadsheet information with hard copies.
But before you file away a receipt, note somewhere how that expenditure relates to your business. This way, if you need to check it in the future, you will know what purpose the items on the receipt served your business. If the items on the receipt include a mix of both personal and business items, highlight the ones that were for your business. Take this smart organizational step for both physical receipts and those saved electronically.
In conclusion, organizing and tracking expenses for small business can be a tedious job at first. However, if you start organizing these expenses from the very start of your business, they'll be less likely to cause you headaches later on. Begin by examining what expenses you had to get your company up and running. Then add to your business expenses and the complexity of your tracking system as your company grows. If your company grows to a point that you can no longer handle expense tracking yourself, it might be time to hire accounting help.
Once you have a system in place to organize your expenses, all you have to do is keep updating it with current information. When it is time to file your taxes or undergo a tax audit, you won't have to scramble to come up with an accurate total and documentation of your company's business expenses. You can also use the system you have in place for organizing your business expenses for budgeting your own expenses. With a good, consistent system in place, you'll have a well-organized and easy-to-access list of small business expenses.