It’s a question every first-time business owner wants to know, and one most small and mid-sized businesses owners need to brush up on—”What business expenses should I be tracking?” Ultimately, you want to know where every dollar earned is spent, so you can create and analyze your profit and loss statement (PNL). When it comes to taxes and determining your gross profits and qualified business expenses, the basics are below.
Costs Of Goods Sold
If you sell or manufacture products, then you must manage and count your inventory accurately to determine your quarterly and annual costs of goods sold. This is essential for determining your gross profits, but also for managing theft. This includes direct and indirect expenses such as:
- Cost of inventory
- Cost of raw materials
- Freight and storage
- Processing
- Packaging
- Handling
- Factory overhead
- Administrative cots
- Direct labor costs
- And more
Capital Expense
It is essential to understand the difference between deductions and capitalized expenses. This includes business startup costs, qualified improvements, and assets. This might include renovations, equipment, company vehicles, and other long-term assets that are an expense that goes back into your business. Depending on the type of capital expenditure, it may be amortized, or deducted, over multiple tax years.
Personal Expenses
It is imperative to keep your personal and business expenses separate, meaning you may need to ring up your purchases separately when shopping. For example, one for your office supplies and a second for your impulse purchase of a vase for your house. However, you may have some shared expenses. Some of the most common shared personal expenses include:
- If you take out a personal loan and invest a portion of it toward your business. For example, if you invest 20% of the loan in your business, you can deduct 20% of the interest for the percentage used for your business.
- If you have a home office or operate your business out of the home, you can deduct 100% of your home office electronics and supplies, and a designated amount of mortgage interest, insurance, utilities, repairs, and depreciation.
- If you are required to drive your car during the workday, not just to and from the office, then you must track your mileage for deduction.
These certainly aren’t the only business expenses you should be tracking, which is why you should reach out to NTRC Tax and Finance to ensure you have an organized accounting system in place.