Keeping proper records of the business expenses is an important task for any company. They help in creating the following financial year’s budget. Apart from that, such records will also help you in getting tax deductions. But before going that far, you need to understand what is meant by the term business expense.
It includes all those expenses that are incurred for payroll, depreciation, rent, repairs, interests and taxes, advertising costs and every other business related expenditures. Amongst them, some are referred as to deductible business expenses. These are ordinary and necessary expenses. The best example of deductible business expense is payroll through spend management.
The tax department follows certain rules and regulation while determining the deductible business expense for any particular tax year. In this article, we will discuss a few basic points about these expenses so that you can understand whether or not your business expenses are tax deductible.
Let us begin with the capital expenses. This basically includes the amount which you have invested from your part. Some of the main capital expenses include the start up costs, improvement costs and the cost of your business assets. The amount that you have spend as you capital expenses is considered as your business asset and tax benefit on them can be enjoyed for the period of more than a year. In general, most of the business owners deduct these expenses, but the smart entrepreneurs get the most out of them. Instead of deducting these expenses, they try to recover them through depletion, amortization and depreciation. This way, you can deduct part of your investment each year.
In case your attempt to start the business fails, the amount that you have spend for searching or for investigating for the particular business will be considered as your personal expenses. They are non-deductible expenses. However, expenses that were incurred after making the decision to start your business will be considered as capital expenses. And such capital loss is tax deductible.
Another form of capital expense is the cost incurred for any kind of improvement. However, such improvement must increase the utility or the general value as well as the life of your business assets. Some of the examples of this kind of improvement may include structural improvements, lighting improvements and electrical wiring etc. But the amount that you have invested for repairing your machinery and office equipment’s are normal business expenses and are no way tax-deductible.
Though your personal expenses are not tax deductible, you can conveniently get deduction on that part of the cost which was incurred for your business. For example, if you are purchasing a new car intended to use partly for business and partly for personal purposes, try to divide the total amount between the business and personal part, and get deduction on the business part of the investment. However, you need to be very careful while showing your personal expenses as your business expenses. Any kind of proved forgery will trigger tax audit and several other legal harassments.