Running a small business is a constant challenge, and it is perhaps no surprise that surveys often show that only half of them survive past 5 years. While that may be better than you expected, we’ve all heard the sayings of 70% or more failing in year one, but that isn’t actually true, it is still a sign of just hard it is to keep a small business afloat.
One reason for that is small businesses work on tighter margins, have fewer fluid assets and are often in highly competitive markets, and that means keeping track of small business expenses can make all the difference. Accurate tracking ensures that you maximize your opportunity for tax deductions and spot problems early.
Throughout this article, we will examine the deductions available for small business expenses and which are the most important for your success.
The importance of tracking your expenses
Accurate tracking of small business expenses gives you valuable insight into budgets, helping create effective financial planning and detailed forecasting for the business. By understanding expenditure in this way, it is easier to predict future cashflow and find efficiency savings in every process.
The other benefit is that by accurately tracking expenses in this way, you can ensure that all deductions you are entitled to are claimed, minimizing your tax bill. The amount of deductions available often come as a surprise, especially to new business owners, but the ability to offset spending on equipment, services and other expenditure for your business against any tax owed can be a boost to small business cashflow.
This is why accurate small business bookkeeping is so important, the more detailed the records, the more you can save on your tax bill.
The most important deductions to look for
Before we look at the most important expenses to track through small business bookkeeping, it is important to be clear just what an expense should be for it to be admissible in your accounts. In general, when we refer to a deductible expense for your business, it should be both ordinary and necessary.
In other words, that purchase should be something that is commonly used in your industry or the type of service you offer. For instance, if you own a bakery, you can’t claim for a new exercise bike as a business expense.
However, there are plenty of things you can claim for, here are some of the important ones you or your bookkeeping service should be tracking.
The cost of your products
This is perhaps the most obvious, but the cost of producing the goods you sell are expenses that you deduct from your tax obligations. This includes both goods sold and those held in inventory, and covers:
- Production Costs such as factory fees
This can be a large percentage of turnover and is particularly important for small business bookkeeping.
Another obvious one. However, while you can deduct your employees’ salaries from your taxes, there are rules to follow. Salaries must be aligned with the industry. You can’t, for instance, hire your partner and pay them $20,000 a month to answer the phones for you and then claim a deduction. A professional bookkeeping service will help you identify what is an is not allowed.
Other Employee Costs
Payroll is not the only employee expense, your costs involved with employee retirement plans and other benefits, for instance training costs or subsidized parking can all be deducted.
Energy and Services
To run your business or office you need electricity, gas, water, broadband, phones and other essential utilities. You can claim the cost of all these essentials against your tax bill. In addition, things like printer ink, stationary and other office supplies can all be claimed as expenses too.
If you rent warehousing, office space or any other commercial property that houses your business, you can deduct those costs against your taxes. However, this only applies to properties you neither own outright nor have any equity stake in, you can’t charge yourself rent and then deduct that.
If you have a vehicle used for the business, then the running costs, including depreciation can be deducted. It is important to also track the miles used for business, as they can be deducted too, check with your bookkeeping service or local tax authorities to check how much per mile you can claim.
Working from Home
It’s not just the workplace where you accrue small business expenses. You probably have an office at home too, and if that is a room or area used exclusively for managing your business, then you deduct the costs of that from your taxes too.
How much depends on local legislation. In some places, you calculate pro rate based on the percentage of your home’s total area is taken up by the office. For instance, if your home office is 10% of the total floor area of the property, you could deduct 10% of the cost of utility bills, heating and so on. In some regions, this has been simplified to a set fee per square foot of space used.
Check with your local legislation or contact a bookkeeping serviceto find out which applies for you.
If you eat at work you can deduct a portion of the costs, the exact amount depends on local regulations. This also applies if you have business meetings at a restaurant or attend any event for business that you purchase food.
From a web designer to a bookkeeping service, a legal advisor to a marketing consultant, if you hire professionals to help with any aspect of your business you can deduct the costs.
Sometimes you may need to travel for business. Whether that is a taxi across town to meet a client or a trip to another country to attend a trade show or conference, the costs are deductible. This includes the cost of flights, taxis, hotels, food and so on. However, you must be able to provide this travel was solely for business, so keep records of the reason for travel within your small business bookkeeping.
Insurance is an essential expense for any business, from public liability to accident, theft and health insurance, you can deduct the costs.
Whether you gift money to a charity or provide other assistance, you can deduct expense of working with them. There are often specific rules in place to outline exactly what is included here, so always check your local legislation or seek out a professional bookkeeping service who can help you.
If you have loans solely dedicated to the business, then you may deduct the interest portion of the payments.
While that list covers a large proportion of expenditure, there are some small business expenses that you cannot directly deduct. However, you can still offset those costs against tax, and that is accomplished through capitalization. This means assessing the depreciation and amortization of a business asset and deducting those costs from your taxes.
There are several forms of expenditure that can be capitalized in this way, the three most common are:
This includes tangible items such as buildings, machinery and vehicles you own, along with intangibles such as trademarks and licenses.
Your Startup Costs
From initial marketing before the business opened to any training courses you took, the cost of meeting suppliers and other expenses associated with the business before launch. If you are unsure what expenditure this applies to, a professional bookkeeping service can guide you.
Investing in your business to improve it, whether that be new machinery, or other equipment and so on are deductible. This is to encourage business improvement as it increases economic activity and strengthens organizations. A small business bookkeepingservice can help you identify the investments that qualify for this.
Some tools to help with your small business expenses
Small businesses are a challenge to run, they take up a lot of your time and energy, With that in mind, you don’t’ want to add small business bookkeeping onto your list of responsibilities taking up yet more hours of the day you don’t have. Here are some tools that can help.
An online tool or software as a service that allows employees to log expenses very quickly and easily. It is an app that allows employees to quickly take photos of receipts, and it then records all the important information from it and uploads it to a database. All automatically with one button tap.
A tool that helps you track your business pending in real time. This includes automatic expenditure approvals and a virtual credit card that allows improved spending management and reduces monthly reconciliation problems.
While those tools help you collect the data needed for accurate small business bookkeeping, that is only part of the process. Binery is a professional bookkeeping service, of which they combine small business expenses records from the software tools above and help you maximize your deductibles. Binery empowers expert bookkeepers with powerful software automation.
Your Money Matters
Cashflow is the biggest enemy of small businesses, especially new ones. It is very easy to simply run out of cash even as sales are rising, which is why tracking your costs, and making sure you maximize every deduction available, you keep more cash in your accounts and ensure a healthy business. This is why a professional bookkeeping service that leverages on powerful automation toolsis a sensible, effective investment for every small business, and its deductible too!