Expense deductions may not be first thing entrepreneurs think of during the financial planning process for small businesses and startups — and that might be costing them. Sure, you’re focused on customer service and improving your products and services. But some easy moves could significantly lessen your tax bill.
For example, say you’re putting 250km per week on your private vehicle to get products out to customers. It might seem time-consuming to keep a log separating business and personal use, but you could be missing out on significant tax deductions — in Australia this would amount to $9,360 per year at the rate set by the Australian Tax Office. Or maybe you shuttered your office and started running your company from a spare room in your home — you may be able to deduct costs related to rent, energy and other business-related expenses. Check with your local tax authority to see what items are tax deductible.
Business expenses are the costs of running a company and generating sales. Given that broad mandate, tax departments don’t usually provide a master list of allowable small-business and startup deductions. But as a general rule, as long as an expense is genuinely incurred in the process of doing business, it’s deductible.
That makes it well worth the time to organise your spending so your business takes all legitimate write-offs, creates an effective financial plan, pays the proper amount in taxes — and doesn’t need to sweat an audit.
What Is a Tax-Deductible Business Expense?
Which expenses may be written off varies depending on the nature of your business. Start by reviewing your local tax authority’s website, which provides an overview of the deductibility of common business expenses and general rules for filing your taxes.
- Australian Taxation Office: Income and deductions for business
- AU Inland Revenue Department: Profits tax (Deductions)
- Income Tax India: Deductions
- NZ Inland Revenue: Deductions from income
- Philippines Bureau of Internal Revenue: Income Tax
- Inland Revenue Authority of Singapore: Business Expenses
Those common business expenses must be incurred in an organisation motivated by profit, though it is not expressly necessary to turn a profit in that financial year. If your business is facing financial problems, or if your startup is pre-revenue, and doesn’t actually generate a profit you should still be able to deduct the cost of those expenses. In some markets, like Australia, you may be able to carry over losses into the following financial year which may carry some tax advantages.
When balancing your books, it’s also a good idea to distinguish usual business expenses from categories that fall under the cost of goods sold (COGs) and capital expenses. This will help you create more accurate financial reports, which in turn will help you make more informed decisions when it comes time to financial planning.
What Are Business Expense Categories?
By developing expense categories that fit your business and recording and organising expenditures as you go, you’ll find it easier to get all the deductions you’re due.
You’ll also save significant headaches for your bookkeeper or accountant. Speaking of, it’s worth spending time with a financial adviser to understand the types of expenses you can and can’t include in a specific category.
Below is a list of example small-business expense categories that apply to most companies, outlining what’s included and how you can qualify for a deduction. Add to this any industry-specific categories, such as R&D costs or spending to seek VC funding.
30 Business Expense Categories for Small Businesses and Startups
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Advertising: This covers the cost of items and services to directly promote or market your business. Examples include fees paid to advertising or marketing companies to produce promotional materials, billboards, brochures, posters, websites and social media images. You may even deduct spending on a PR campaign.
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Professional education: This can include courses for continuing education or seminars to stay current on industry trends. Relevant materials, books and registration fees for you and your employees are tax-deductible. You can also deduct payments made to employees to reimburse them for relevant educational expenses.
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Credit and collection fees: Businesses that use accrual basis accounting, where revenue and expenses are recorded when they’re earned or incurred even if no money changes hands at that point, can deduct unpaid invoices as business bad debt. Any fees spent trying to collect on debt, such as hiring an outside company to collect what’s owed, also count. A better bet: Minimise bad debt and increase cash flow by optimising your billing processes.
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Bank fees: Interest paid on business loans, ongoing credit lines and business credit cards are tax-deductible expenses. Bank fees, such as monthly maintenance or overdraft fees, also count.
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Dues and subscriptions: Subscriptions to industry magazines or journals related to your business can be deducted on your taxes. Membership fees include those paid to professional or trade associations that can help promote your business and even to your local chamber of commerce.
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Employee benefit programs: Payments made toward perks and benefits such as health insurance, car, phone or internet allowances and other similar benefits are tax-deductible. Note that this is one area, along with workers’ compensation insurance, where companies tend to spend more than they need to.
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Insurance: Besides that workers’ compensation insurance, you can deduct premiums for business-related insurance, including for liability and real estate. Auto insurance premiums are a bit more complicated: if the vehicle is exclusively for business use, it should be completely tax deductible, but if it is also used as a personal vehicle you must determine the percentage of time it is used for business purposes and only claim deductions on that portion of the costs.
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Maintenance and repairs: Companies that use fleet vehicles as part of their operations can deduct operating expenses including parking fees and fuel. Additionally, repair and maintenance of other types of equipment and machinery used in your business can also count.Under actual expenses calculations for vehicles, you may include fuel, repairs, tyres, insurance, registration fees, licenses and depreciation (or lease payments) prorated to the total business kilometres driven.
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Legal and professional expenses: These can include fees paid to certified public accountants (CPAs), financial planners, lawyers or other types of professionals.
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Office expenses and supplies: Items such as cleaning products, paper, notebooks, stationery and even snacks and beverages for employees can be deducted as supplies. The expenses category includes costs related to operating your business, such as website hosting and software.
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Telephone: Monthly telecommunications fees in a commercial space can be deducted, as can additional phone lines in a home office as well as mobile phone contracts as a subcategory of office expenses.
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Utilities: For a commercial space, utilities such as electricity, internet, building management fees are fully deductible. For a home office, you can deduct utilities in proportion to how much of your home is used for business.
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Postage and shipping: Stamps, freight and postage fees to mail business-related items, including products to customers and return shipping labels, count. Envelopes and packaging materials are included in office supplies.
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Printing: Items such as ink cartridges, printers or payments for printing services can be included under this business expense category, which is great news for businesses that lean on direct-mail marketing, like real estate agencies.
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Rent: Any rental payments made to occupy a warehouse for inventory or office space to conduct business are tax deductible.
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Salaries and other compensation: Employee salaries, gross wages, commissions, bonuses and other types of compensation count as tax-deductible expenses. Compensation can even extend to salaries paid to children and spouses, provided payments were made through payroll and those individuals performed services for your business. The amount paid does need to be considered reasonable.
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Travel: Business-related travel expenses include taxi and rideshare trips, flights, and hotels as well as allowances for meals and other relevant costs incurred on a business trip.
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Business meals: You can deduct food and drink purchases that relate to conducting normal business, such as work conferences and meals on business trips. As a rule of thumb, these should be proportionate to the business you are carrying out — for a busines that’s just started out, a coffee with a client or prospect is easy to justify but a lavish employee event for a business with only a few staff may not be as easy to claim.
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Moving expenses: For work-related moving expenses, you may be able to deduct 100% of the costs related to an employee’s move. Depending on your local tax authority, this may need to pass a distance test, such as the new job location being at least 50km from the employee’s former home.
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Depreciation: These are costs for big ticket items like machinery or a vehicle over its lifetime use, instead of it over one single tax year.
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Charitable contributions: You can deduct charitable contributions made to qualifying organisations — you may need to itemise these deductions.
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Child care: In some markets, like Singapore, costs associated with child care may be written off, though the care will need to meet the relevant local requirements.
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Startup expenses: In most countries, startup costs like business registration and legal services are considered capital expenses and not tax deductible. However, you may be able to deduct other expenses related to starting your business — for example, if you took out a loan to start your business, you should be able to claim the interest paid as a deduction.
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Loan interest: If you’re purchasing a building or taking out a loan to build or improve your home for business purposes, you may be able to deduct the interest incurred.
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Software: Technology expenses, such as bookkeeping software or recurring subscriptions with SaaS companies, used for business related purposes may be fully tax deductible.
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Licenses and permits: Any required licenses and permits can be tax deductible. Examples include building permits or licenses to practice law in your market.
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Manufacturing or raw materials: These are directly related to the cost of goods sold or items and storage paid to sell your products.
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Retirement contributions: Contributing to a superannuation or pension account can reduce your taxable income — a great way for those who are self-employed to save on taxes.
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Real estate taxes: If you have a home office and itemise your taxes, you may be able to deduct some of the taxes you pay.
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Client gifts: Gifts for employees, clients or vendors may be fully tax deductible. For example, if you give your employees gift baskets during the holiday season or send gift cards to vendors.
If you have employees who frequently travel for business, ensure you follow small-business expense management best practices like making it easy for them to upload the receipts required by the IRS.
3 Steps to Categorise Expenses for Your Small Business or Startup
Poor tax compliance and inconsistent cash flow are among the top 10 financial challenges for small businesses. You can break that mould by being consistent in categorising expenses. That allows you to see where and how much you’re spending to operate your company while being prepared come tax time.
You’ll also gather insights that will enable you to create a financial statement that adds visibility into profitability and cash flow. These statements are required for audits and are often requested by investors.
Here are three steps to categorise business expenses.
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Determine correct categories for your specific business. Choosing the right categories will depend on your industry. For example, a greeting card business may have dedicated categories for shipping and storage rental, whereas software-as-a-service (SaaS) companies may have categories for digital services.
Start by identifying the expense categories your business uses the most — that financial statement will help here — and ones that you’ll need to grow. Refer to the list above to get started.
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Reconcile and review financial accounts regularly. Reviewing financial accounts is a good habit that will encourage you to stay on top of your expenditures. Reconciling bank statements can be easily done using accounting software. If you find you’re having challenges, a business-only credit card is a top expense management best practice.
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Assign a category to all transactions. Using the list of categories you came up with, look at your spending details and assign anything deductible. Pay particular attention to where receipts are required. Note that keeping business and personal finances separate is a top financial tip for small businesses and shields you from liability, so as you assign an expense, make sure it’s business-related.
What Else can I Deduct as a Business Expense?
As we’ve mentioned, your home can yield many deduction opportunities when also used for work, based on the percentage of space your office occupies — but you’ll need to itemise mortgage interest, utilities, insurance and property taxes.
A few other items you may not have considered:
Costs to protect intellectual property created by you or your employees, such as software code, a logo for your business or a patent for a new product or service.
Losses from a natural disaster or crime. If a fire or flood destroys your stock, or items are stolen, you may deduct losses not covered by your insurance.
Use Accounting Software to Track Spending and Categorise Business Expenses
One of the easiest ways for business owners to categorise expenses and track spending is to use accounting software, which often has prepopulated business categories. You can amend or add as needed, and it will automatically compile transactions.
Accounting software also helps you to use the data from your expenses to run profit and loss reports. Doing so shows you the amount you’re spending in each category so you can assess whether you need to get your costs under control or if you’re on track. You can break down spending at specific time intervals to see how expenses change. These reports simplify the deduction process while revealing your annual business expenses.
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Small Business and Startup Expense FAQs
What can be written off as a business expense?
Generally, if an expense counts as ordinary and necessary to conduct business, you can deduct it as a business expense. There is no comprehensive list because what counts as “ordinary and necessary” is highly dependent on industry.
What can’t be written off as a business expense?
Any spending considered a personal expense can’t be written off. In addition, you can’t deduct expenses related to client entertainment (with the exception of meals); fines or penalties for violating a law; country club dues; and illegal payments.
Can you deduct job expenses?
In most instances, job expenses incurred by workers but not reimbursed by employers, are not deductible. However, if a business reimburses an employee, then the employer can deduct that reimbursement as an expense.
Can I write off my business startup costs?
Businesses can write off startup costs, depending on the type of expenditure. Allowable deductions must be directly related to getting the business up and running and organisational in nature, such as training staff and incorporation fees.
What are three major types of expenses?
The three major types are fixed, variable and periodic.
- Fixed expenses are those that don’t change for the foreseeable future. These can include auto lease payments or rent.
- Variable expenses are expenses such as utilities, which can change from month to month.
- Periodic expenses are ones that happen occasionally, like business travel or emergency car repairs.
