Business Expense Categories

As an entrepreneur, you need to be familiar with business expense categories to determine what is deductible when you pay your taxes. Although most entrepreneurs are aware of business expense categories like utilities, salaries, travel, and rental expenses, there are others that many people don’t know about, such as the potential for excluding educational expenses and even the cost of a business mentor. In this article, you’ll learn everything you need to know about business expense categories.

What Are Business Expenses?

According to the Internal Revenue Service (IRS), business expenses are any costs that come during the process of doing business. These expenses are ordinarily deductible if the company is supposed to make a profit. The IRS insists that if you are engaged in nonprofit activities, you must report your gross income (without deductions) from the activities you are involved in.

For any business expense to be deductible, it must be both ordinary and essential. Ordinary expenses are those that are common and accepted in your business, while necessary expenses are those that are useful and appropriate for your business. A business expense doesn’t have to be indispensable to be seen as essential. Business expenses are different from the expenses used to determine the cost of goods sold, capital expenses, and personal expenses.

Business Expense Categories

Many entrepreneurs align their business expense categories with the small business tax deductions they hope to claim. Your business expense categories should make sense to you, your accountant, or your corporate controller. If you looked up the role and definition of a corporate controller, you’d see that coming up with business expense categories is one of their primary roles.

There are two main business expense categories: general and administrative expenses, and discretionary expenses.

What Is A General And Administrative Expense?

General and administrative expenses include all day-to-day operating costs that are not associated with producing a good or service. They include a wide variety of costs, such as rent or mortgage payments, office supplies, advertising and marketing costs, salaries, taxes, employee benefits, licenses and permits, and insurance, among others.

General and administrative business expenses do not include the direct costs of producing or acquiring goods and services for sale. These expenses are calculated separately as costs of goods sold. The general and administrative business expense category also excludes the costs of research and development.

Some general and administrative expenses like rent, mortgage, insurance, and loan interests are fixed costs that are incurred, whether you’re producing goods or offering services.

Other general and administrative expenses, such as the cost of distribution, employee benefits, etc., are variable costs that can be adjusted according to your company’s sales volume. Notably, the amount of money your company spends on general and administrative business expenses plays a vital role in determining your profitability.

What Is A Discretionary Expense?

A discretionary expense is a cost that your business can survive without. Therefore, your business can remain effective even if all your discretionary spending is halted. These expenses include meals, entertainment, travel expenses, vacation expenses, luxury vehicles, etc.

Discretionary business expenses rarely have anything to do with your business’s day-to-day operations. Instead, they have everything to do with lifestyle and wants. If you have a good business mentor, they’ll tell you that the most successful businesses pay for discretionary expenses with their discretionary income; this money is left over after paying for general and administrative costs. If your sales volumes are reasonable, you will have more money to pay for this kind of expense.

If times are tough and your business faces serious short-term cash flow problems, you should sit down with your corporate controller and managers to figure out any unnecessary expenses. These excess costs could be put aside until the situation improves. Your company’s daily operations shouldn’t be affected by the stoppage of discretionary expenses.

Certain business expense categories and tax deductions go together. Therefore, you can save a significant amount of money and time on your tax filing if you correctly organize your business expenses. Furthermore, well-organized business expenses will make it easier to pitch your business plan to potential investors, apply for a loan, or develop your financial projections.