Check out how to manage, control, and track any small business expense arising out of your daily operations for steady and perpetual growth.
It’s not an easy game to manage a business. Even the slightest of impacts can make the business crumble like a house of cards. Significantly, small businesses are the most fragile and impact-sensitive undertaking. Stats show that small businesses tend to wrap up quite easily than medium and large-scale ones.
According to experts, only 10 percent of small businesses can last for a year. Better yet, only half of the businesses tend to last for over 5 years. This data shows how competitive and tough it is for small businesses to survive in a market full of complexities like minimal margins.
Problems are there, however, the simple concept of small business expense tracking and monitoring can be the solution. If you want your business to head on, then you need to know how to track business expenses and reduce the same to a minimum.
This blog is solely dedicated to this. Here, we will help you learn the advantages of expense tracking and other aspects of the subject matter.
What are the Advantages of Small Business Expense Tracking?
The core behind the success of any business is to plan, forecast, and budget accordingly. This is where the tracking of the small business expense comes in. Tracking expenses can be a great tool that can help you execute all these tasks. When you have an idea about the incomings and outgoings of cash, you can easily forecast future requirements and make arrangements accordingly.
Apart from this, a lot of small business owners do not know this, but with the help of expense tracking, they can figure out which one of the expenses they can deduct from the taxable income. This allows businesses to reduce the total tax liability arising during any business year.
So, let’s understand, what kinds of expenses can a business deduct?
Deductions of the Small Business Expense
IRS defines and states that any small business can make a deduction of the expenses from the taxable income if such expense is regular and unskippable. This means that all the expenses that are of utmost importance to the business, can be deducted. The expense should be for the sole purpose of business and not otherwise. Below are different small business expense that a business can deduct, in general:
Accessories & Supplies
If you are buying some accessories or hiring them for the business, then you can deduct such expenses from your income. Other supplies like fuel, communication bills, power, water, etc. fall under the same and should be deducted for the benefit of the business. However, such expenses are only deductible within a year from the date of the expenditure.
Office in the House
If you are undergoing business activities or have set up an office in your own house or its premises, then the expenses related to that official part of the house can be deducted by the business. For ease of business, it has been defined by the IRS that a business can deduct a maximum of $5/sq ft for the same.
Food is yet another small business expense that you can deduct from the taxable income. If you are ordering or even cooking food at your business palace, then you can deduct a maximum amount of half of the cost of the food or the cost of cooking the food. Similarly, if you had to go out for fun, but for the sole benefit of your business, you can deduct such expenses as well.
COGS or Cost of Goods Sold
The cost associated with the selling of the goods is an activity that’s solely related to the business. Hence, this is the type of small business expense that any organization can deduct. The expenses are inclusive of the expenditure related to the procurement of raw materials, warehousing them, and/or producing them in the factory.
Sometimes, a business may buy or rent a vehicle to conduct its business easily. You can deduct the expenses to ensure that the vehicle operates smoothly, including the depreciation. Similarly, the fuel spent for business activities can also be deducted, but at a fixed rate of 54.5 cents/m.
Traveling is another small business expense that you can deduct. Sometimes, the business owners of the staff employed within may need to travel to different locations to learn and grow. As these expenses are related to business operations, the same can be deducted. From stay to ticket fare, from meal to accommodation, and other related expenses are also included here.
At times, the business may hire some third party to help it proceed with some requirements. For example, the business may hire startup accounting services at the Ledger Labs. The business is free to deduct such expenses from the income.
Lease or Rented Accommodation Expenses
If you are operating the business under a leased or rented accommodation, the cost of such a property falls under the deductible small business expense category. However, if somehow, the business owner has some equity in such property, then it can be not deducted.
Salary or Incentives
If you are paying someone a salary or some incentives for their services, then you can deduct the cost of such a small business expense. However, the amount to be deducted would be the same as per the rates or charges levied by any other business in the prevailing market.
Employee Benefits and Insurance
If you are paying for some employee benefits like child care, staff learning, etc. then this small business expense can also be deducted. The same games are for the insurance of the staff or the owner himself.
Interest on Borrowings
If you are paying some interest on the borrowings accepted for business purposes, then you can also deduct such interest. This is another small business expense that you should keep an eye out for.
If you donated some sums or gifts of other kinds in some kind of charity or trust, then you can deduct the number of such sums. However, for this, you need to check the list of organizations eligible under the IRS.
Now that the small business expense and its related deductions are clear, let’s know which of the expenses can a business deduct via capitalization.
Expense Management And Reduction With Minimal Efforts. Find Out How.
Capitalization of the Small Business Expense
Before you figure out how to track business expenses, another thing you can do is the capitalization of the expenses. There are certain expenses that you can deduct from the taxable expenses. Below are the expenses that you can use for tax benefits using the capitalization technique:
Costs of Starting a Business
At times, some expenses may occur while starting or setting up a new business. Expenses like training, traveling, advertising, surveying, etc. can be capitalized from the taxable income.
For business purposes, you may procure some assets like computers, servers, infrastructure, patents, trademarks, copyright, etc. You can capitalize on the cost of such assets quite easily.
How to Track Business Expenses?
It’s not easy to track business expenses. If you try tracking the expenses roughly on a sheet, then you may end up wasting your time and racing nowhere. Expense tracking is easier said than done. For the same, you can either take the help of some online or offline tools or hire a group of experts, like the ones provided by Ledger Labs, who can undertake your business’s accounting and bookkeeping requirements.
How Do I Deduct or Capitalize A Small Business Expense?
Now, the big question that arises is, how can any small business deduct or capitalize the expenses to avail of the tax benefits? Although the categories provided above cover most of the expanse, they do not cover all.
As you know, all the expenses related to the business can be deduct from the taxable income. It’s smarter for a business to separate such business expenses as and when they are chargeable. This allows you to just go through the entire expenses and deduct or capitalize on the go. You or your accounts team will not have to check every single transaction and small business expense to find out which one of these can be adjust.
If you think that this task of tracking and figuring out the deduction requirements is a little complicated, then there are tons of helpers that you can hire. Both online and offline services are accessible to all, who wish to hire some executives to take care of such requirements. This approach is smart as well because when you rely on or outsource the job to experts, they can easily figure out and minimize your tax liabilities using smart, yet justifiable techniques and approaches.
A safe way to proceed with this approach would be to talk and connect with the experts first before hiring. This will allow you to know everything about the tracking of small business expense and get your queries answered. With field experts like those at the Ledger Labs by your side, you can get the desired services as and when the need arises. It’s tough for a small business to survive the competition, but when you move cautiously and smartly, you can breach and surpass that 5-year benchmark effortlessly.
Hi, I am Gary Jain & I help business owners in taking control of their business finances by being a one-stop solution for all their accounting, taxation & CFO advisory needs.
Being an entrepreneur myself, having built and scaled businesses in a variety of domains, has helped me think from the perspective of the business owners and thus bringing in the clarity of the practical problems and their equally practical solutions.
Being from a humble background, I have always valued the importance of conserving resources & I dont like overspending businesses. I advise and work towards tightening the cash outflow tap and making business owners take a very different approach to managing their finances.