Why Budgeting and Tax Planning are Important
The two most important financial tasks of a business owner are budgeting and tax planning. Budgeting, especially watching cash flow, keeps your business from overspending and getting into trouble with making payments.
Tax planning has two purposes: To keep you from having unexpected payments at tax time and to keep your taxes to a minimum—legally, of course—through tax avoidance strategies.
Although different types of businesses have different expenses, here is a list of the most common business expenses which most businesses must pay. Read through the list to be sure you don't miss any of these expenses.
The more business expenses you can take as tax deductions, the lower your business income, and the lower your business taxes. But you must be able to prove these expenses before deducting them. If you can't prove expenses, you may have problems with a tax audit.
Why You Must Prove Your Business Expenses
To deduct these expenses on your business tax return, you must be able to prove that they are legitimate business expenses. You can't deduct personal expenses for business tax purposes. Be sure to keep excellent records.
Every business needs a place to operate, and there is almost always a cost for the location. It might be a mortgage on a building or rent on a leased office or retail space, or a part of the cost of space in your home business.
Let's look at some monthly location costs in detail:
Mortgage: If you own a building and have a mortgage on that building, the interest on the mortgage is deductible. The property itself is an asset that is depreciated (that is, the purchase cost is spread out over time.) You can deduct the depreciation expense for the current year.
Building lease: If you are leasing a building or commercial space for your business, you can deduct the cost of the lease payments and all other costs associated with the lease. You can only deduct the current year's payments on the lease and you can't depreciate the lease because it's not property owned by your business.
Home business location: If you have a business in your home, you can deduct some of the costs of the home, based on the space that is used both regularly and exclusively for business purposes.
If you have a small office space in your home, you may be able to use a simple calculation to get the cost of this space to put it on your business tax return.
Utilities, Phone, and Computer Expenses: If you rent or own a business building, your business must pay the cost of utilities: electric, gas, water, sewer, and other city services like trash pickup. If you are renting a location, some of these costs might be included in your rent.
If you have a home-based business, your home landline is not deductible as a business expense, but you can deduct the cost of business-related long-distance calls (save your phone bill). Also, the cost of a second line for business use is deductible.
Don't forget the costs of cell phones and computer Internet lines.
Equipment, Furniture, and Machinery
You can deduct the cost of buying things like office furniture, retail shelving, machinery, and basically anything you have inside your business that lasts longer than a year. The IRS calls them capital assets and says you must depreciate them (spread the costs over a number of years).
Calculating depreciation and following the IRS regulations is complicated. It's best to just collect information about the costs of buying your business assets and turn this over to your tax professional.
Some equipment that you purchase for your business is considered listed property. The main categories of listed property are passenger cars, transportation vehicles, and property generally used for entertainment, recreation, or amusement. Listed property is a special IRS category that requires you to keep business and personal costs separate and deduct only the business part of the expenses.
Vehicles and Driving Expenses
If you buy a car or truck for your business, the cost is depreciated, like the other business assets described above. To be available for the depreciation deduction, the vehicle must be driven at least 50% of the time for business purposes. Keep extra-good records on this one; it's one of the top three big issues in an IRS business audit.
You can also deduct the cost of driving your car for business, using either of two methods: a standard deduction or actual expenses.
Other Services and Maintenance Expenses
Other services that most businesses incur are maintenance costs on the facility, equipment, and general building maintenance. Businesses also have costs for lawn mowing, snow removal, and other outside costs. You can also deduct costs for repair and maintenance of your business property, or you may decide to depreciate some of these expenses. Check with your tax professional about this.
You will need to keep track of the amounts you pay for outside services like janitorial services, professional services, or internet support. If you pay someone $600 or more during a year, you must provide that person with a 1099-NEC form (starting in 2020) and file that form with the IRS.
Every business needs several types of insurance and you can deduct insurance costs as a business expense. You can only deduct the cost of insurance for the current year; you can't pay next year's insurance and deduct it this year.
Wages, Salaries, Payroll Taxes, and Benefits
You will need to pay employees according to the payroll system you have set up. The cost of employee wages and salaries and some employee benefits are all deductible to your business. You can also deduct employment taxes, including:
- Your employer part of FICA taxes (for Social Security/Medicare taxes)
- Unemployment taxes (federal and state)
- Workers' compensation fund payments
Supplies and Other Office Expenses
You can deduct the cost of materials and supplies you use during the year. IF you keep incidental materials and supplies on hand, you can deduct these if you don't keep a record of them or take inventory and if this method doesn't distort your income for the year.
You can deduct the cost of fees you pay to professionals, including your attorney, CPA/tax professional, and other professional consultants. You may not pay these people every month, but budget money in this category just in case.
Legal and professional fees you pay in the process of buying business assets, including buying or starting a business, aren't deductible. They are added to the basic cost of the property and are included in depreciation or amortization of the property.
Advertising and Marketing Costs
Include monthly costs for advertising including social media marketing and other marketing and promotion activities, such as newspaper ads, billboards, and online advertising. You could include web maintenance costs here or put these costs under office expenses.
Business Club Association Fees
Fees for your membership in a professional association or business group should be included here, as well as professional publications. For example, you can deduct the cost of joining a chamber of commerce, professional or trade association. You can't deduct costs for membership in any club organized for a social purpose, like a country club, sporting club, or airline club, even if you do business there.
For these expenses, you will need to:
- Include them in your monthly list of expenses for budget purposes and
- Keep good records to show the business purpose for each for tax time.
Travel expenses: Keep track of air travel, hotels, and meals while you travel.
Business Meal expenses: You will only be able to deduct 50% of these costs, but keep detailed records and include them in your budget and taxes anyway. Business entertainment expenses are no longer deductible (2018 and forward).
You will need to set aside money to pay income taxes by sending in quarterly estimated tax payments. These payments must include your estimated self-employment taxes (Social Security and Medicare for self-employed individuals), Employment taxes (taxes for employees) are deductible. Federal income taxes are not deductible, but other taxes are deductible business expenses.
Don't forget to include an amount for miscellaneous expenses in your budget and your tax planning. You never know what might come up, and you will need money to pay for unexpected expenses.
Be sure to know which business expenses you cannot deduct. They may still be part of your budgeting process.