The key to organizing small business expenses is placing them in the right categories. These categories can help you budget and analyze your business's performance. It will also make tax time easier to identify expenses that qualify for tax deductions or credits quickly.
Broad Categories of Expenses
On an Income Statement, you separate expenses into broader categories and then subdivide those into more specific categories. The broadest categories for expenses are operating vs. nonoperating expenses. Operating expenses are the most common and include those incurred during the regular course of business.
Nonoperating expenses, on the other hand, are those incurred through an activity unrelated to the business's core operations. Common nonoperating expenses include interest expense, taxes, impairment charges, and "one-offs" or unusual expenses. Financial statement users may want to see operating profit, also referred to as earnings before interest and taxes, to gauge the performance of the business's core operations.
You may find another broad category on the Income Statement within operating expenses: Selling, general, and administrative (SG&A) expenses. SG&A expenses include all costs not directly related to the production of a good or the performance of a service. It may include advertising, marketing, accounting, information technology, legal, human resources, and administration. Additionally, rent, utilities, and supplies not directly used in producing a good are also included in SG&A.
Specific Categories of Expenses
The general ledger is the core of a business's accounting record keeping. It is where all financial transactions are recorded. The general ledger is then used to generate the business's financial statements, including the Income Statement. At the general ledger level, you subdivide expenses into their most basic elements. These are some of the more specific categories for expenses.
Salaries and Wages
Salaries are a fixed amount paid to an employee during a pay period, and wages are based on a set hourly rate. You can generally deduct employee pay for tax purposes.
There are many types of benefits that may appear in a general ledger. Common benefits include health insurance, life insurance, short and long-term disability, retirement contributions, unemployment, and workers' compensation. Certain insurance premiums and contributions to qualified retirement plans are tax-deductible.
Training and Education
A tax deduction is available for work-related education expenses incurred to maintain or improve a skill needed for your present line of work. It is also available for a training or education cost required by law to keep your present job or status.
Marketing and Advertising
Business cards, website hosting fees, web or print ads, and brochures are all part of marketing and advertising expenses. Reasonable costs incurred to advertise your business are tax-deductible.
Rent is a payment for the use of a space that is not owned by your business. Generally, rent is a tax-deductible expense.
Printer paper, pens, staplers, and cleaning supplies are all examples of supplies expense. Supplies consumed during the year are typically tax-deductible.
Clothing that is job-specific and cannot be used as daily wear outside of work is tax-deductible. For example, a business polo with a large logo would be deductible.
Research and Development (R&D)
A research and development (R&D) tax credit is available to businesses that develop new or improved products, processes, software, techniques, formulas, or inventions that result in new or improved functionality, performance, reliability, or quality.
Repairs and Maintenance
Repairs are expenses incurred to fix something that is broken. Maintenance is an expense incurred to keep an item in good working condition, and it is generally performed on a set schedule. Repairs and maintenance that do not improve the value of an existing asset or extend its life are tax-deductible. If the cost is instead an improvement, it is capitalized and depreciated over time for tax purposes.
Electricity and gas are examples of utilities. They are tax-deductible to the extent that they are directly business-related.
Internet, landline phones, and business cell phones are examples of communication expenses. They are tax-deductible to the extent that they are directly business-related.
Depreciation and Amortization
Depreciation is the value lost by property, plant, and equipment (PP&E) over time. Amortization is the value lost by an intangible asset over time. These capitalized assets are not tax-deductible in the year the original cost is incurred, but rather the expenses are spread over multiple future years.
Interest expense is the first nonoperating expense on this list. It represents the ongoing cost of a business's debt, and it is typically paid to a lending financial institution. Interest expense is typically tax-deductible, but certain limitations are based on the total amount and type of debt.
The total taxes payable by your business is an estimate throughout the year based on current activities, as you won't have the exact figure until tax time.
Impairment Charges and "One-Offs"
Currency exchange fluctuations, obsolete inventory impairments, restructuring costs, and expenses incurred due to a rare natural disaster are examples of "one-offs."
There are many categories and subcategories of expenses; your industry and specific business needs will help you identify which of these expense categories are necessary and useful to track and analyze.