Whether you're a startup founder, small business owner, or seasoned entrepreneur, having a comprehensive understanding of business spending can make or break your company. Not only will it help you catch payment discrepancies, but it will enable you to maintain a healthy cash flow. And as you've probably heard, cash is king in this economy. Especially since 82% of small businesses fail due to cash mismanagement. 

In this guide, I delve into the world of business expenses, from the importance of proper tracking to the different types of expenses and their tax implications.

But before we dive into the intricacies of business expenses, let's first establish what they are. 

What are business expenses? 

Business expenses refer to the costs you incur while operating your business day to day. They’re the same expenses you must carefully track throughout the year to deduct from your taxable income. 

To be deductible, business expenses must fall within the categories of "ordinary or necessary" expenses. Generally, "ordinary expenses” are common and widely accepted in your industry, think business meals or mileage, whereas "necessary expenses" are deemed essential or helpful in your particular line of work or trade, like inventory, rent, and utilities.

You have to keep an accurate record of expenses to support your deductions and ensure you comply with tax regulations. By clearly understanding what qualifies as a business expense and what doesn't, you can maximize your tax deductions and better manage your cash flow, which is a must to ensure your company's financial well-being.

Categories of business expenses 

Business expenses are classified into several distinct categories. Each serves a unique purpose and allows you to gain better oversight over finances, optimize your business budgeting efforts, and make more informed decisions about resource allocation overall. 

Let's explore some of the most common categories:

Fixed expenses

These expenses remain consistent month over month, regardless of the level of business activity. Examples include rent or lease payments for your office space, insurance premiums, membership fees, and employees' salaries. Since fixed expenses are predictable, they provide stability in your business budget and planning overall. 

Variable expenses

Unlike fixed expenses, variable expenses fluctuate with the level of business activity. They’re directly tied to the volume of goods produced or services completed. They can include costs for raw materials, production supplies, utilities, and sales commissions. As your business operations change, variable expenses will adjust accordingly.

Periodic expenses

Periodic expenses occur at specific intervals, usually annually or quarterly. These expenses aren’t incurred often but still play a critical role in your financial planning efforts. Examples include business license renewals, equipment maintenance contracts, professional certifications, and tax filing fees. Properly planning for these expenses will help you avoid unexpected financial strain.

Interest expenses

If your business has borrowed money or has outstanding debt, interest expenses come into play. They represent the cost of borrowing funds from lenders or financial institutions. These expenses include interest payments on business loans, lines of credit, or credit card balances. Managing interest expenses is crucial to maintaining a healthy cash flow and minimizing debt burden.

Depreciation expenses

Depreciation refers to the gradual loss of asset value over time due to obsolescence, wear and tear, or technological advancements. These expenses include costs related to the depreciation of buildings, equipment, vehicles, computers, and other tangible assets. Properly accounting for depreciation helps reflect the actual cost of using assets in your business and financial statements.

Business expenses vs. personal expenses 

You also need to draw a clear line between business and personal expenses. But how do you properly differentiate them? Simply put, personal expenses are only related to your life outside the company and aren't tax-deductible, while business expenses are incurred solely for business purposes. 

To simplify business spending, keep separate bank accounts and credit cards for business transactions, diligently track and document expenses, and consult a qualified accountant to ensure accurate expense categorization. 

Here are a few examples of potential trouble that can arise from misclassifying expenses in your business:

Tax consequences 

Misclassifying personal expenses as business expenses can result in inaccurate tax reporting, leading to potential audits and IRS penalties. For instance, claiming personal vacations or personal meals as business expenses can raise red flags during an audit. For that reason, ensure you accurately document and distinguish between personal and business expenditures to avoid complications and maintain the integrity of your financial records.

Financial distortion

Incorrectly categorizing expenses may distort your business's financial performance and profitability, making it challenging to assess your true financial standing. That's why keeping clear and accurate financial records is essential for making informed decisions about your business's financial health, securing funding, and attracting potential investors. Separating personal and business expenses ensures accurate financial reporting and allows for a more precise evaluation of your business's performance.

Accounting challenges

Poor expense classification can make your accounting process complex and time-consuming. Tracking and analyzing business-related costs becomes difficult when intertwined with personal expenditures, leading to confusion, errors, and inefficient bookkeeping practices. Therefore, establish clear guidelines and systems for expense tracking and categorization to streamline your accounting processes and ensure accurate financial reporting. Properly labeled expenses also make it easier to generate financial reports, assess profitability, and prepare for tax season.

What business expenses are tax-deductible, and which aren’t?

Now that we have explored the fundamental details of business spending, let's discuss tax-deductible and non-deductible expenses. As with any other business, you can deduct numerous expenses from your taxable income; however, make sure to consult with a qualified tax professional or accountant to ensure your tax filings are accurate and you respect IRS regulations. 

Below are some of the most common examples of tax-deductible and non-deductible expenses. For an extensive list, you’ll want to refer to the IRS.

Examples of tax-deductible business expenses

• Software
• Business mileage
• Credit card processing fees
• Maintenance and repair costs 
• Business insurance premiums
• Office supplies and equipment
• Travel and transportation costs 
• Office rent or mortgage payments 
• Marketing and advertising expenses
• Equipment maintenance and repairs
• Education and training for employees 
• Depreciation of assets and equipment
• Utilities such as electricity and internet
• Employee wages and benefit programs
• Professional services like accounting and legal fees. 

Examples of non-deductible business expenses 

• Lobbying expenses
• Political contributions
• Demolition expenses or losses 
• Government fines and penalties
• Expenses incurred before starting your business
• Fines and penalties imposed by regulatory bodies
• Personal expenses unrelated to the company, such as groceries or personal vacations 
• Capital expenses, such as purchasing real estate or equipment (though these may be eligible for depreciation or amortization deductions).

How to track business expenses effectively 

As you can see, tracking business expenses is crucial to your business's financial management. It helps you control your business budget, provides valuable insights into spending patterns, identifies cost-saving opportunities, and ensures compliance with tax regulations. 

While there are multiple ways you can track and manage business expenses and ensure you can claim tax deductions, some methods are more manual and tedious than others. 

A great way to simplify the process is to use a business credit card and associated virtual cards to manage company spend.

With a spend management platform like Extend, you can create virtual cards from your existing business credit card and effortlessly track business spending via an intuitive and easy-to-use interface, 24/7.

You can issue virtual cards across your organization for various business expenses, enabling secure and controlled spending across departments and employees. Also, you can customize virtual cards with spending limits, merchant restrictions, and expiration dates, ensuring expense compliance and reducing the risk of unauthorized spending.

Moreover, you can benefit from various platform features to further simplify expense tracking and gain better visibility, control, and efficiency. For example: 

• Real-time expense tracking: You gain instant visibility into transactions, which allows you and your finance team to stay updated on spending activities and monitor expenses as they occur, not at the end of the month. 

• Automated receipt capture: Capturing and organizing receipts becomes effortless since you can attach receipts and invoices with corresponding transactions. This eliminates the need for manual entry, reduces the risk of lost or misplaced receipts, and saves you time in employee outreach due to built-in notifications within the platform. 

• Expense categorization and reporting: With expense categorization, you can assign custom tags and categories to transactions. This makes it easier to analyze spending patterns, generate detailed expense reports, and streamline financial reporting processes.

• Integration with accounting software: You can seamlessly integrate the platform with your accounting software, such as QuickBooks, ensuring a smooth flow of expense data into your financial systems. This integration can save you time and eliminate the need for manual data entry.

Benefits of tracking business expenses 

Maintaining organized and accurate records of your business spending provides several benefits:

• Improved financial management: Having visibility and a clear understanding of where your dollars are spent allows you to align with your budget, reduce overspending, and make informed decisions regarding business budget allocation. This leads to improved financial control and increased profitability.

• Accurate tax reporting: Proper expense tracking ensures that you have accurate records to support your tax deductions. This minimizes the risk of errors, penalties, and audits, giving you peace of mind during tax season.

• Cost control and savings: By actively monitoring and analyzing expenses, you can identify areas where you can reduce costs. Whether it involves negotiating better deals with suppliers, optimizing vendor contracts, or finding more cost-effective alternatives. Tracking expenses empowers you to make strategic decisions that maximize savings and improve your bottom line.

• Business growth opportunities: By continually analyzing your expenses, you will gain valuable insights into your business's financial health. You can identify trends and areas where you can optimize costs and reinvest savings into business growth. This could include expanding your product offerings, investing in marketing campaigns, or improving operational efficiency.

Take control of your business finances with Extend. 

Effective spend management is a critical aspect of running a successful venture. Get in touch to learn how your existing corporate card can get you there.