Business Expenses

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School

CUNY Borough of Manhattan Community College *

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Course

330

Subject

Accounting

Date

Nov 24, 2024

Type

pdf

Pages

Uploaded by fifoeliverta

11/19/23, 8:58 PM Intuit Academy https://intuit.docebosaas.com/ia/learn/course/6712/play/22659/intuit-academy-tax-level-1-business-income-and-expenses-oics6722;lp=518 1/2 What Are Business Expenses? Business expenses are costs incurred in the ordinary course of business. They can apply to small entities or large corporations. Business expenses are part of the income statement. On the income statement, business expenses are subtracted from revenue to arrive at a company's taxable net income. Business expenses, or "deductions," are divided into capital and operational expenditures. Understanding Business Expenses Section 162 of the Internal Revenue Code (IRC) discusses guidelines for business expenses. The IRC allows businesses to report any expense that may be ordinary and necessary. Business expenses need not be required to be considered "ordinary" or "necessary." Generally, ordinary means that the expense is typical in the industry, and most business owners in the same line of business or trade would potentially expense these things. Necessary means that the expenses that help in doing business are appropriate. A business owner might be unable to handle the business if they did not make the expenditure. An expense that meets the definition of ordinary and necessary for business purposes is tax- deductible, and the company can expense or pay the costs. Some business expenses may be fully deductible, while others are only partially deductible. Below are some examples of allowable, fully deductible expenses: Advertising and marketing expenses Credit card processing fees Education and training expenses for employees Certain legal fees License and regulatory fees Wages paid to contract employees Employee benefits programs Equipment rentals Insurance costs Interest paid Office expenses and supplies Maintenance and repair costs Office lease Utility expenses

11/19/23, 8:58 PM Intuit Academy https://intuit.docebosaas.com/ia/learn/course/6712/play/22659/intuit-academy-tax-level-1-business-income-and-expenses-oics6722;lp=518 2/2 Income Statement Reporting The income statement is the primary financial statement used by entities to record their expenses and determine their taxes. Entities typically have three categories of expenses broken down by direct costs, indirect costs, and interest on the income statement. Direct Costs Companies use the inventory value on hand at the beginning and the end of each tax year to determine the cost of goods sold (COGS), which is a sizeable direct expense for many companies. COGS is deducted from an entity's total revenue to find the gross profit for the year. Any expenses included in COGS cannot be deducted again. Expenses that are included in calculating COGS may consist of direct labor costs, factory overhead, storage, costs of products, and costs of raw materials. Indirect Costs Indirect costs are subtracted from gross profit to identify operating profit. Indirect costs include executive compensation, general expenses, depreciation, and marketing costs. Subtracting indirect costs from gro results in operating profit, also known as earnings before interest and tax. Depreciation Expensing of business assets is usually done by deprecation. Depreciation is a tax-deductible expense on the income statement and is classified as an indirect expense. Taxpayers can deduct depreciation expenses over several years, including costs of computers, furniture, property, equipment, trucks, etc. Gifts, Meals, and Entertainment Costs There are several costs that the IRS has restrictions on, primarily associated with gifts, meals, and entertainment. Generally, employers can only deduct up to $25 for gifts and only 50% of the cost of providing meals to employees, although businesses may fully deduct certain meals. The rules may change, so it's important to double-check the current restrictions on the IRS website. Interest Expenses The last section of the income statement involves expenses for interest and tax. Interest is the last expense a company subtracts to arrive at its taxable income, sometimes called adjusted taxable income. Personal Expenses In some cases, expenses incurred by a business owner may be personal and business-related. For example, a small business owner might use his car for personal and business-related activities. In this case, the taxpayer can deduct the portion of miles used for business purposes. In the case of home offices, taxpayers can deduct the costs associated with the part of the home exclusively used for business. Non-Deductible Expenses Some expenses incurred by a business are not reportable. These expenses include bribes, lobbying costs, penalties, fines, and contributions to political parties or candidates.

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