The Business Expenses You Should Track

The Business Expenses You Should Track

As you build your business, you will quickly realize there are a lot of hats to wear…one of them is the bookkeeper hat. One of the most important jobs of this role is to track your business expenses.

This can leave us with a lot of questions as to what specifically qualifies as an expense. In this article, we break down some of the most common business expenses you should track. Then, you can confidently work with your CPA to get the biggest tax deduction.

Tools & Supplies

These are going to be anything you use to create your products. It could be software, packaging, tools, or even safety glasses. All the things you need to do your job or make your product are included.

Not sure if a tool would be considered required or necessary? Perform this simple test: consider a room full of your peers who make similar or like-kind products. Would they consider the tool required or necessary? Do they use this tool? If you are still unsure, talk with your bookkeeper to help you differentiate.

Raw Materials

Raw materials are anything that physically goes into the products you are making and then handing over to the buyer. If you are making clothing, it would be the fabric. The sewing machine would be classified as a tool. If you are painting a picture, the paint and canvas would be the raw materials, while the paintbrush, easel, and your smock are tools.

Rent

Just like traditional office space, if you rent storage or inventory space, that is an additional business expense. This is probably one of your higher business expenses and one you should definitely be tracking. 

If you use part of your home as your office space, this can be deducted as well. You need to know the square footage of your entire home and then the square footage of your office space. Take that percentage and multiply it by your mortgage or rent to get your home office expense. Also, you can use this same calculation for your utilities. There are other ways to calculate the home office deduction. Your CPA can advise you on the best option for your business.

Marketing

It costs money to get your name out there. Any marketing expenses you incur—whether via Facebook advertisements, printed flyers, or even a marketing contractor you hire—should be recorded as marketing expenses.

Mileage & Travel

Maybe you are hoping to attend an event or meet with a potential client that is not local. Those travel expenses should be recorded. Whether that is vehicle mileage or a plane ticket, you can deduct those expenses. If you do drive to an event, be sure to record how many miles it is you traveled. The IRS allows for deductions based on the mileage that is multiplied by the standard mileage rate. This rate changes on a yearly basis, so it is best to record your mileage for each event as it comes up.

Payment Fees

Do you accept payment through Stripe or PayPal? Maybe you use PayPal to pay contractors? When you use services like these you often incur a fee. These fees are deductible. However, they can be a bit tricky to record since some bookkeeping software does not separate out this fee when the data is being pulled in from your bank. So be sure to regularly reconcile your accounts and make sure the Stripe or PayPal fees incurred match with what you have in your records.

This is not limited to Stripe and PayPal. Some similar processing fee services include:

  • Upwork
  • Amazon
  • Shopify
  • Square

Contractors

Sometimes, some of our best work is done in collaboration with other business owners. Depending on how you have formed relationships with these men and women, if they fall under the category of “independent contractor,” then monies paid to them are deductible.

This can get a bit blurry in some areas if you do not formally set up an arrangement. For example, if you make cosmetics but buy the natural fragrance from another maker, some may assume you are contracting out work, but the fragrances are raw materials and deductible. 

In the early days of your business, it is common to try and find ways to save money any way you can. Tracking your expenses and recording them is one of the best ways to help you save money right away! As a business owner, you will come across plenty of expenses the IRS will allow you to
deduct, so take advantage of every opportunity!

If you are struggling to classify expenses or could use another pair of hands while you create, send us a message to get started.