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Common Business Expenses and Why You Should Track Them
Here’s a deep dive into common business expenses every business owner should track and categorize as deductible and non-deductible.
Keeping an eye on your expenditure is a must-do for any business owner, but that’s not as easy as it seems. It might seem like a couple of standing desks or office chairs are nothing much in the grand scheme of things. But when left out of your books, these common business expenses can make or break your profits.
Many small business owners and startup founders often fall short when tracking common business expenses, simply because they don’t know what qualifies under that category.
What are common business expenses?
Simply put, common business expenses are any business-related expenses you pay to keep your company running. These expenses are commonly split into two categories— tax-deductible and non-deductible business expenses.
Splitting your business expenses into clear expense categories is a great way to visualise which business expenses are eligible for a tax deduction and which are non-tax-deductible. We’ll dive into the types of expenses you can deduct from your taxes below.
Examples of common business expenses
Accurate forecasting of your company’s expenses helps your business not just survive, but grow.
Common business expenses are the easiest to forecast and budget for. This is because they usually have quantifiable unit costs and are repeat purchases, making these common company expenses the easiest to consider when budgeting.
Though every industry has its own unique expenses, here are some of the more common types of company expenses every business has to manage:
- Office rent and mortgages
- Loan payments
- Interest payments
- Employee wages or freelance workers’ compensation
- Advertising and marketing spend
- Office expenses
- SaaS expenses
- Business insurance
- Legal fees
Of course, there are several business expenses that might be a little confusing to identify. Check out our blog post on accounts payables to find out how to categorise those expenses.
What are deductible business expenses?
As mentioned previously, common business expenses are split into two kinds: deductible and non-deductible expenses. According to the Internal Revenue Service (IRS), deductible expenses are expenses that are wholly and exclusively incurred in the production of income.
Here are the full-list of requirements a business expense must meet to be considered tax-deductible:
- Expenses that are incurred solely in the production of income.
- Expenses that are not contingent liability. In other words, it does not depend on an event that may or may not happen in the future.
- Expenses that are revenue rather than capital in nature.
- Expenses that are not prohibited from deduction under the Income Tax Act.
Any expense that falls under those categories is eligible for tax deductions, which means a reduction in your taxable income and the overall amount of tax your company has to pay. Examples of deductible business expenses include:
- Advertising and social media marketing spend
- CPF contributions
- Employee wages
- Rent for office space
- Staff education expenses
- Business travel expenses
- Business meals and meetings
- Office supplies
- Health insurance
What are non-deductible business expenses?
Any expenses that do not fall within the requirements above are non-deductible. These usually include personal expenses that are not for business use or unrelated to business purposes. Examples of non-deductible expenses include:
- Expenses included before the incorporation of the company
- Private-hire transport
- Fixed asset write-offs
- Income tax
- Additional employee benefits
- Entertainment expenses
Why you should track your business expenses
When it comes to tracking business expenses, things can get really mundane. That’s part of the reason why many startups and small business owners shy away from tracking business expenses as a whole. But putting in place a strategy to monitor your business finances can really pay off in the long run. Here are a few reasons why you should start tracking your business expenses if you haven’t already.
Financial awareness for improvement
Keeping tabs on your expenses not only allows you to identify areas that you might be spending unnecessarily on, but also helps you understand where you could be optimising your budgeting.
In the long run, being on top of your finances is the key foundation to forecasting and making plans for growth.
Prepare for tax season
Trust us when we say no one looks forward to the end of the tax year. And having to scour your drawers for receipts and invoices makes the process worse.
Tracking your business expenses can give your accounting team an easier time with bookkeeping. No need to stress out over loss invoices, or scramble to get every employee’s reimbursement records in at tax time.
Keeping a neat account of your common business expenses also makes it more convenient when you’re trying to figure out what is tax-deductible. This helps save your business time, and hard-earned money through tax returns.
Determine financial health and profitability
Profitability is a goal many startups and small businesses gun for. The formula for profit is easy: subtract your actual expenses from revenue and you’ll know if you’re still in the red.
Determining the financial health of your company is a walk in the park when you keep an accurate record of your business expenses. Knowing your actual business income means that the next time a prospective investor asks, you’ll be able to give them a precise picture of your business finances and goals.
Prevent potential crisis
You definitely wouldn’t want to run out of cash when running a business. A lack of cash flow and poor cash flow management is the reason why 82% of small businesses fail. Knowing how much cost your business is incurring enables you to know your financial boundaries.
Doing so helps you predict possible big-ticket items your company might purchase, such as preparing for a huge advertising campaign that’s going to be financially hefty.
3 Ways to track business expenses
Expense tracking is a company-wide effort. Teams need to be fully aware of the tools and processes in place for expenses to be tracked properly. Below are three ways businesses can track their business expenses.
1) Digitize your expense management
Paper is out, digital is in. We’re pretty sure that sitting down in a meeting room and collecting paper receipts isn’t something anyone in your team would like to do.
By digitally organising receipts and invoices throughout the month, you save time on end-of-month reconciliation efforts. Digitising your business expense tracking also gives you more clarity on different business expense categories.
2) Invest in bookkeeping software
Digitization is usually done with the help of accounting software. Many SaaS solutions on the market have integrations that merge both your bookkeeping software and employee expenses records. Having a full view of your business expenses at any time optimises your accounting process.
3) Grow your finance team
If you’re a startup or small business owner, you might be the only person in your finance team. This isn’t a problem. But as your business grows, you’ll very likely be on the hunt for some finance aficionados to help you out.
Having a finance team can help establish the trajectory of your business growth, especially when it comes to setting standardised expense procedures for the whole company.
Our top tip to efficiently track business expenses
Our top tip? Investing in an automated expense management system. Basically, digitization, software, and a finance team rolled into one. An expense management system like Spenmo will make tracking common business expenses a breeze.
With Spenmo, you’ll be able to give each employee their own virtual business card. Set limits for spending on each credit card via your company bank account. Rather than tracking individual receipts, this feature offers real-time updates on your expense records in a single dashboard.
Automated spend management tools like Spenmo can cut down the hassle of tracking small business expenses. Storing your expenses in a single, visible dashboard saves you time and money, so you can focus on scaling your business.