Business expenses

What Are Business Expenses?

Business expenses refer to the various costs companies take on to keep their operations running. These can include rent, employee wages, office supplies, inventory, insurance, business travel, meals, and more. Understanding these expenses is essential for maintaining healthy cash flow and minimizing tax liability.

A Closer Look at Business Expenses

According to Section 162 of the Internal Revenue Code, allowable business expenses are those that are both ordinary (commonly accepted in a particular trade) and necessary (helpful and appropriate for business operations).

Business costs generally fall into three main categories:

• Fixed expenses – Regular and predictable costs such as salaries, lease payments, and insurance.
• Variable expenses – Costs that fluctuate, including inventory purchases, utilities, and travel.
• Periodic expenses – Irregular but recurring costs like marketing campaigns, equipment repairs, or annual bonuses.

From an accounting perspective, these expenses are recorded on a profit and loss statement and deducted from gross income to determine net profit. If expenses qualify under IRS definitions, they can reduce taxable income either partially or in full.

Tax-Deductible Business Expenses

Many operational costs are eligible for tax deductions. Examples include:

• Rent or mortgage for business property
• Utility bills
• Office supplies and equipment (including repairs and rentals)
• Computer hardware and software
• Employee wages and commissions
• Health insurance and retirement contributions
• Professional development or training
• Contractor or freelancer payments
• Marketing and advertising
• Business vehicle mileage
• Legal and professional services
• Insurance premiums
• Licensing fees
• Travel-related costs (airfare, hotels, rideshare, rental cars)
• Business meals and entertainment (often limited to 50% deductibility)

The Home Office Deduction and Depreciation

If you operate your business from home, you may qualify for the home office deduction, which allows you to write off a percentage of your housing costs based on the portion used exclusively for business. For instance, if 10% of your home is used as a dedicated office, you may deduct 10% of mortgage interest, utilities, and maintenance expenses.

Large purchases like furniture, vehicles, or equipment that last more than a year are considered capital assets and must be depreciated over time. Under GAAP (Generally Accepted Accounting Principles), businesses can use various depreciation methods, such as:

• Straight-line
• Double-declining balance
• Modified Accelerated Cost Recovery System (MACRS)
• Units of production

Tools like Beyond can help automate these calculations and ensure compliance with tax rules.

Expenses That Aren’t Tax Deductible

Not every business-related cost can be deducted. Some non-deductible expenses include:

• Demolition costs or property losses
• Fines and legal penalties
• Lobbying fees
• Political donations
• Personal spending not directly tied to business activity
• Meals where no business purpose is established

Best Practices for Tracking Business Expenses

Staying organized is key when managing business expenses. To prepare for tax season:

1. Separate personal and business spending. Only costs directly tied to your operations should be considered business expenses.
2. Keep documentation. Save receipts, invoices, and records for all deductible expenses.
3. Use accounting software. Tools like Beyond can simplify expense tracking and categorize deductions accurately.
4. Retain proof for at least three years. If audited, you’ll need to show evidence for every deduction you claim. Scanning and storing digital copies is also a smart backup strategy.