How to track expenses for small businesses

As a business owner, there are costs associated with running your own operation. Whether you’re a real estate agent who pays annual membership dues or a marketing consultant who requires subscriptions to the latest software, most entrepreneurs incur various expenses related to their business. But here’s the good news: Certain business expenses are tax deductible.

According to the Internal Revenue Service (IRS), a business expense must be both ordinary and necessary to be considered deductible. In other words, business expenses must be both common and accepted in your industry as well as helpful and essential in doing business.

That’s why tracking business expenses is critical. It’s one of the main ways you can help bolster cost savings. Read on to learn what a business expense is and how to track it.

Why tracking business expenses is important?

By tracking business expenses, you can gain a better understanding of how much money you’re spending to keep your operations running. It’s one of the best ways to analyze whether you’re overspending and how you may be able to cut costs. That will also give you a more accurate snapshot of your profit.

Review monthly, quarterly, and annual expense reports to check if you’re under or over budget. Once you establish an overall trend, you’ll be better equipped to answer questions relating to upcoming plans. For instance, if you need more inventory, do you have the cash flow to increase your expenses and how will that impact profit?

How to track business expenses

Tracking business expenses isn’t as complicated as it may sound. Here’s a rough step-by-step guide:

  • Review and identify each expense item related to your business
  • Categorize them and add general descriptors such as inventory, travel, office space, etc.
  • Create an expense report with the date, payment type, description, type of expense, and total amount
  • Review data on a monthly or quarterly basis

What are examples of business expenses?

Depending on the industry you’re in, there are many unique business expenses that may apply to you. However, there are also numerous general business expenses and tax deductions that apply to most businesses, such as:

  • Home office space
  • Mortgage interest
  • Security system
  • Property taxes
  • Maintenance, repairs, or upkeep
  • Insurance
  • Vehicle
  • Membership dues
  • License fees
  • Software or production machinery

Personal vs. non-deductible expenses for small businesses

Unlike ordinary and necessary business expenses, such as a broken laptop or a company cell phone, personal or non-deductible expenses are considered nonessential to operating a business and therefore cannot be subtracted from company income on a tax return. Examples of non-deductible expenses include:

  • Personal meals
  • Client entertainment
  • Customer gifts exceeding $25

Check out more popular tax questions and answers.

Different types of business expenses

There are three types of expenses all business owners should be familiar with: fixed, variable, and unexpected.

Fixed expenses

A fixed cost does not change and can be recurring such as rent a business pays on its headquarters or an auto lease for a company car.

Variable expenses

Variable expenses differ from month to month as they are directly tied to a business’ costs of goods sold. For instance, if a tutoring company signs up five new students and requires a new freelance teacher to provide services, the company’s variable expenses will increase. Other examples include payroll for a business largely made up of contractors (like the tutoring company), as well as overtime expenditures, raw material costs, production supplies, and delivery fees.

Unexpected expenses

Unexpected expenses are costs incurred that a business is not expecting, such as sudden equipment failure (e.g., a broken laptop) or expenses related to an emergency.

Read more on how to manage your operations.

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