Business Finance

Hacking Your Business Expenses For More Profit In 2020

Learn how to find more opportunities to generate cash inside your own business, even if you are operating at a loss.

Every year, at the end of the year, business owners that have generated profits are tasked with filing tax returns for their businesses. If you are a business owner and you have generated sufficient profits, then you will have to pay a portion of your profits to the government as income taxes. Ouch!

If you are like most business owners then you will try to find ways to decrease that tax liability. What you are typically looking for in those cases are special incentives called tax benefits. Tax benefits come in multiple forms: deductions, exclusions, and credits.

This post is going to focus on tax deductions. A tax deduction is a business expense that can be subtracted from your business income. You then pay taxes on the lower income level.

It can be easy to gloss over the importance of tax deductions. Here’s a statistic to put things into perspective:

In 2011 tax deductions for corporations alone were $27.1 trillion (Source)

That same year the USA GDP was $15.54 trillion USD (Source)

Notice that the Tax Deductions by Corporations alone were almost 2x the entire GDP of the United States! While I don’t want to get into the details of why that’s even possible just think about the impact of Tax Deductions.

Learning about tax deductions is guaranteed to increase your financial acumen. If you are like most small business owners the biggest tax deductions you can take are expense deductions. Because expenses have such great benefits, I want you to start thinking about expenses as more than just expenses.

Any money that you spend in your business is an investment.

Simply put, expenses are Investments into your business.

When you plan for an investment, do you plan for a return?

Getting A ROI For Business Expenses

Expenses are just like any other investment, you should plan for and expect a return. From that perspective there are really 4 categories of expenses:

  • High ROI
  • Low ROI
  • No ROI
  • Negative ROI

As a business owner, identifying the high ROI expenses is going to increase your ability to make strategic financial decisions. Strategic financial decisions will allow you to maximize the flow of cash into your business while decreasing the flow of cash going out. Ultimately those decisions will lead to higher margins and better profitability.

On that same spectrum, negative ROI expenses move your business backwards, creating the opposite effect of poor cash flow and low margins and profitability.

Getting A ROI For Business Expenses

To start off, there are three main kinds of expenses from a tax perspective.

  1. Fully Deductible
  2. Partially Deductible
  3. Non Deductible Expenses

The key takeaway here is that fully deductible expenses are always an asset. If you decided to invest your entire business’ budget into advertising and didn’t generate any sales, your business would still be left with a bunch of tax deductions.

Those tax deductions are so valuable that you may even be able to sell them.

We put together a short list of criteria to determine if an expense is deductible for your business:

  • To be deductible, a business expense must be both ordinary and necessary.
  • An ordinary expense is one that is common and accepted in your trade or business.
  • A necessary expense is one that is helpful and appropriate for your trade or business.
  • An expense does not have to be indispensable to be considered necessary.

Once you’ve determined how deductible an expense is, the next step is to determine ROI.

  • Fully deductible expenses are more likely to to fall into the high ROI category.  
  • Partially deductible expenses are less likely to to fall into the high ROI category.  
  • Non Deductible expenses are even less likely to fall into the high ROI category.

If you’re feeling ambitious, you can also separate business expenses from the following expenses:

  • Expenses used to figure the cost of goods sold - Cost of goods sold is like the gas for your vehicle. No gas means you can’t drive the vehicle. You’ll be going nowhere. These expenses show up on your income statement. These expenses are almost always going to be fully deductible and high ROI.
  • Capital Expenses - These expenses are directly related to payments used purchase and depreciate assets. They’re like upgrades to your vehicle. These expenses show up on your balance sheet and income statement. These are more likely to fall into the partially deductible category and less likely than cost of goods sold to be fully deductible.
  • Personal Expenses - are exactly what you think. Your business doesn’t need them to operate. These expenses are most likely to fall into the non deductible category and are almost always negative ROI.

So what can you do with all of this information?

Summary  

Treat your business like an investment. Opportunities to reinvest in your business will always present themselves as expenses. Learn how to identify which of those expenses will give you the higher return on your investments and your business will thrive.

If you want to learn more about making these strategic financial decisions for your business, join our free 20 day email course.

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