What Are Business Expenses?

Business expenses are costs incurred in the ordinary course of business. They are subtracted from revenue to arrive at a company’s taxable net income. Business expenses൲ are also referred to as deductions.

Every business, from the ﷺconsultant working from home, to the smallest corner store, to the largest corporation, has business expenses and tracks them t𒅌hroughout the year for tax purposes.

Business expenses are generally divided into two broad categories, capital expenditures and operational expenditures. That is, some expenses relate to major pu🦹rchases made to improve a company's performance over the long term. Others relate to the spending necessary to run company operations from day ൲to day.

Understanding Business Expenses

Section 162 of the 澳洲幸运5开奖号码历史查询:Internal Revenue Code (IRC) details the guidelines for business expenses. The IRC allows businesses to report any expense that may be ordinary and necessary.

Business expenses need not be required to be considered ordinary or necessary. Generally, ordinary means that the expense is common in the industry and most business owners in the same line of business or trade would normally incur them. Necessary means that the expenses are appropriate and a business owner might not be able to manage without making the expenditure.

An expense that meets the definition of ordinary and necessary for business purposes can be expensed and, therefore, is 澳洲幸运5开奖号码历史查询:tax-deductible.

Some business expenses may be fully dဣeductible𝔉 while others are only partially deductible.

Be🃏low are some examples of fully dedu🍸ctible expenses:

• Advertising and marketing expenses
• Processing fees from 澳洲幸运5开奖号码历史查询:business and corporate credit cards
• Education and training expenses for employees
• Certain legal fees
• License and regulatory fees
• Wages paid to 澳洲幸运5开奖号码历史查询:contract employees
• Employee benefits programs
• Equipment rentals
• Insurance costs
• Interest paid
• Office expenses and supplies
• Maintenance and repair costs
• Office lease costs
• Utility expenses

How Expenses Are Recorded

The income statement is the primary financial statement used by businesses to record their expenses and 🤪determine their taxes. Most😼 have three categories of expenses, broken down by direct costs, indirect costs, and interest.

Direct Costs

The value of 澳洲幸运5开奖号码历史查询:inventory on hand at the beginning and the end of each tax year is used in determin𝓰ing the cost of goods sol♚d (COGS), which is a large direct expense for many companies.

COGS is deducted from an entity’s total revenue to determine 澳洲幸运5开奖号码历史查询:gross profit for the year. Any expenses included in COGS cannot be deducted again. Expenses that are included in calculating COGS may include 澳洲幸运5开奖号码历史查询:direct labor costs, factory overhead, storage, costs of products, and costs of raw materials.

Indirect Costs

Indirect costs are su𝕴btracted from gross profit to identify operating profit. Typical indirect costs include executive compensation, general expenses, depreciatio☂n, and marketing costs.

Subtracting indirect costs from gross profit results in operating profit, which is also known as earnings before interest and tax.

Depreciation

Expensing of business assets is usually done by depre💛ciation. Depreciation is a tax-deductible expense on the income statement and is classified as an indirect expense.

Depreciation expenses can be deducted over a number of years. They typically include the costs of computers, furniture, property, equipment, trucks, and more.

Gifts, Meals, and Entertainment Costs

The IRS places limits on costs associated with gifts, meals, and entertainment. For example, you can usually deduct 50% of the cost of providing meals to employees, although certain meals may be fully deducted.

Interest Expenses

The last section of the income statement details expenses for interest and tax. Interest is🔥 the last expense a company subtracts to arrive at its taxable income, sometimes called adjusted taxable income.

Personal Expenses

In some cases, expenses incurred by a business owner may be both personal and business-related. For example, a small business owner miꦅght use the same car for personal purposes and business-related activities.

In this case, the portion of miles used for business purposes can be deducted. In the case of home offices, costs associated with the portion of the home that is exclusively used for business are generally deductible.

Non-Deductible Expenses

Some expenses incurred by a business are not deductible. These expenses include bribes and kickbacks, lobbying costs, penalties, fines, and contributions made to political parties or candidates, among others.

The Bottom Line

The key to business tax reporting and business expense deductibility is that expenses are "ordinary and necessary." That's the phrase the IRS uses to describe the 澳洲幸运5开奖号码历史查询:costs of doing business. Those costs are deducted💞 fromไ income in order to arrive at taxable income for the period being reported.