Decoding Business Expenses
Are You Missing Out on Deductions?
Understanding business expenses can feel like trying to solve a puzzle with half the pieces missing. Many business owners spend countless hours tracking their costs, only to worry if they're claiming the right things or, even worse, if they're missing out on valuable deductions. The good news? It doesn't have to be that complicated. A business expense is simply a cost that is "ordinary and necessary" for your industry. But what does that really mean? In this guide, we'll demystify business expenses and help you confidently identify what you can deduct. We'll also cover some common expenses you might be overlooking and give you a simple system to track everything all year long.
What Exactly is a Business Expense?
According to the IRS, a business expense must be both "ordinary and necessary" for your trade or business. While that might sound a bit vague, it's actually a straightforward concept:
Ordinary: An expense that is common and accepted in your industry.
Necessary: An expense that is helpful and appropriate for your business.
For example, for a freelance photographer, a new camera lens would be both an ordinary and a necessary expense. Similarly, for an independent web designer, software subscriptions like Adobe Creative Cloud would be considered both ordinary and necessary. The key is that the expense must be directly related to generating revenue for your business, not for personal use.
Common Overlooked Deductions
Many business owners are great at tracking obvious expenses like office rent and payroll, but they often miss a few key deductions that can add up over the year. Make sure you're not leaving money on the table.
Home Office Expenses: If you run your business from home, you can likely deduct a portion of your rent or mortgage, utilities, internet, and even property taxes. The key is to have a dedicated, regularly-used space for your business.
Continuing Education and Subscriptions: Costs for professional development, such as online courses, workshops, and seminars, are often deductible. The same goes for subscriptions to professional publications and software that helps you stay current in your field.
Bank Fees and Interest: Did you know you can deduct business-related bank fees, credit card interest, and loan interest? Make sure to separate your business and personal accounts to make tracking these expenses easy.
Vehicle Use: If you use your personal vehicle for business-related travel, you have two options for deductions: a standard mileage rate or the actual expenses (gas, oil, repairs, etc.). Keep a detailed mileage log to track your business-related trips.
Advertising and Marketing: The costs of promoting your business, from website hosting and social media ads to business cards and professional photography, are fully deductible.
Best Practices for Tracking Expenses
Knowing what to deduct is only half the battle. The other half is having a reliable system to track everything. A little organization throughout the year can save you a mountain of stress and money come tax time.
Separate Business and Personal Finances: This is the single most important tip. Using a dedicated bank account and credit card for all business expenses makes it easy to track your spending and prevents confusion.
Keep Digital and Physical Records: For every expense, save both a digital and a physical receipt. Consider using a scanner app on your phone to immediately capture receipts and store them in a cloud-based folder.
Use Accounting Software: Tools like QuickBooks Online are a game-changer. They allow you to easily link your bank accounts, categorize expenses automatically, and generate accurate reports with just a few clicks.
Schedule a Weekly Review: Instead of a massive clean-up at year-end, set aside 15-30 minutes each week to review and categorize your transactions. This small, consistent habit will keep your books clean and accurate.
Don't Overlook Small Expenses: Those small purchases—a coffee with a client, a business-related app, a pack of printer paper—add up over time. Make sure you are tracking every single one.
Mastering business expenses isn’t about being a tax expert; it's about being organized and proactive. By understanding what to deduct and building a consistent system for tracking, you can save money, reduce stress, and gain a clearer picture of your financial health. Ready to stop worrying about your expenses and start using them to your advantage? At Jetty Wave’s Bookkeeping, we help business owners like you implement these best practices and ensure you never miss a deduction.
We're here to help. Contact us today to learn how our services can simplify your bookkeeping and help you keep more of your hard-earned money.
