How to Determine Business Expenses

It is a good idea to keep organized records of all business expenses.

Business expenses fall into two broad categories: legitimate or qualified business expenses, and capital expenditures. Business expenses include such things as lease, rent or mortgage payments; property taxes; wholesale purchases; and marketing and advertising expenses. Capital expenditures are those expenses that can be written off as they depreciate in value, such as computers and vehicles. Within the two broad categories are three types of expenses: fixed, variable, and mixed. Fixed expenses do not change from month to month, while variable expenses change on a monthly basis.

Things You'll Need

• Spreadsheet
• Federal and state tax forms

Instructions

1. 

   List all monthly expenses in a spreadsheet in alphabetical order. Include rent or mortgage, payroll, inventory, advertising, utilities and every other expense incurred. Next, categorize all listed expenses according to type: fixed or variable. Fixed expenses remain the same month to month, while variable expenses fluctuate.

2. 

   Review both the fixed and variable lists, then qualify each expense by determining if it is what the IRS describes as "ordinary and normal." Ordinary and normal expenses include, but are not limited to, employee pay, retirement plans, insurance, taxes and rent.

3. 

   Fill out the necessary state and federal taxes forms, including all your qualified expenses. Form 535 gives a more comprehensive list of allowable business expenses and required federal forms. Double check each item for qualification and accuracy. After completing the forms, have them reviewed by a CPA or tax professional.

Tips & Warnings

• Have a CPA or tax professional write or review all business tax filings.

• Due to the complexity and yearly changes in the tax code, deductions and credits may change from one year to the next.

References

• Jackson Hewitt
• Tufts University

Resources

• IRS
• Form 535