Starting A Business Is Difficult And Confusing
Starting a new business is gratifying, but it isn’t easy. There are many variables to consider, from the viability of your business plan to hiring to marketing.
One thing to keep in mind is that everyone who starts a business will encounter surprises. Every business is different, even within the same industry. Many factors affect your success, some of which you can’t control, like the current economy.
While preparation and knowledge go a long way, you should give yourself room to make mistakes. When you encounter a setback, don’t give up. Instead, try to view it as a learning opportunity.
Remember, help is available and you don’t have to do everything alone. Consider contacting your local Small Business Administration chapter for advice and training.
Common Business Expenses That May Be Surprising
One of the frustrating parts of running a small business is unexpected expenses. If you’re aware of these types of expenses, you’ll be able to make room in your budget. Some of them are tax deductible business expenses, which will help you save money over time.
Below, we'll cover five common business expenses that may come as a surprise.
1. Educational Initiatives And Promotional Products
Educational and promotional products are optional for most businesses. However, they can have a significant impact on your company’s success.
There are a variety of sources for business education, such as the SBA’s Office of Entrepreneurship Education. In late 2019, Amazon announced its Small Business Academy, which aims to help entrepreneurs learn about digital marketing, brand building, and other topics.
Some education expenses are deductible, especially for sole proprietors. The IRS offers an interactive tool that confirms whether certain education costs can be written off.
Promotional products are items that bear your company’s name, logo, or slogan. They’re an effective way to increase brand awareness and are usually cheap to produce. Popular options include tote bags, pens, and calendars. If you’re attending a conference or seminar, bringing some promotional items is a great way to connect with potential clients.
When you choose promotional products, it’s essential to balance affordability with quality. You should avoid handing out items that'll give customers a bad impression. At the same time, you shouldn't use up too much of your marketing budget.
2. Meals and Entertainment
Meals and entertainment for clients, business partners, and employees are a great way to build relationships. They give you a chance to get to know people in a more relaxed environment than the office.
To start, find ways to thank new clients for their business. A nice meal or an event, like a baseball game, is a popular way to show your appreciation. If you want to reward employees, a catered lunch or a team-building activity can be fun ways to connect.
At the end of 2017, new tax laws passed regarding how meals and entertainment (M&E) are deducted. These new laws made it harder to earn tax deductions for this type of expense. For example, meals with clients and business partners are no longer deductible. Some M&E expenses are now deductible at 50 percent of their cost.
Other M&E costs are still fully deductible. You can write off 100 percent of the cost of food, beverages, and entertainment for employees in most cases.
Consider having separate expense accounts for purchases that are fully, partially, or non-deductible. This method makes it easy to calculate how much you’ll owe when you file at the end of the tax year.
3. Annual Domain Registrations and Web Hosting Fees
Most likely, your business will benefit from having a website, even if the business itself isn't web-based. Having a professional site helps customers find you and learn about what you offer.
The main costs associated with a business website are domain registration and web hosting. Domain registration is the process of obtaining a custom URL that's related to your business.
You don’t strictly need a custom domain. However, having one will make it easier for potential customers to find and remember your site. It'll also help your business appear legitimate and professional.
A web host is a company that stores your website on their server. Typically, a web hosting service will help you get your domain name registered.
There are low-cost services available for registration and hosting. Domain registration often costs $15 or less annually. Some web hosts offer free options or basic packages that cost less than $50 per year. These affordable options are sufficient for many small businesses.
You might need something more robust, with features such as customization and credit card acceptance. If so, your web hosting costs will range from $50 to $400 per year. Typically, domain registration and web hosting fees are typically tax-deductible.
4. Extensive Office Supplies
When you think of office supplies, you might picture items like staples and Post-it notes. These supplies are crucial for most offices, and while they’re cheap, their costs can add up. In addition to small items, you’ll need to think about larger purchases, such as equipment, furniture, and lighting.
Your employees may need desktop or laptop computers. If you go the desktop route, you’ll need keyboards, mice, and monitors. Along with computer hardware, you’ll need software. The price of software varies greatly depending on your industry and your business’s needs.
Most offices, no matter how small, need at least one printer. Once you’ve purchased this type of equipment, you’ll need to keep it stocked with supplies such as toner and paper.
If your business ships goods to customers, plan for packaging and shipping costs. Even if you don’t ship goods, you may need envelopes and stamps for occasional business mail. In addition, if you have a storefront, you’ll need shelving, cash registers, credit card terminals, and more.
Most office supplies are 100 percent deductible. For equipment and office furniture, you can deduct up to $1 million in purchases.
5. Permits and Licensing
Many small businesses need permits or licenses to operate legally. The type of permit or license, and the fee to obtain it, depend on a few different factors. These factors include your industry and the state where your business is based.
Some businesses will need a business license, state license, county permit, and sales tax license. If your company is open to the public, you may need a permit from the fire department. If you sell food, you’ll need a health department permit.
In addition, certain businesses conduct activities that are regulated by a federal agency. These activities involve special licensing. For example, if you sell fireworks or other explosives, you’ll need a license from the ATF.
While permits can be expensive, it’s worth the upfront cost to avoid the consequences of not having them. The fees and fines for operating without proper authorization are steep.
Many fees for permits and licenses can be written off on your taxes. Check with a tax professional for specifics.
How To Be Prepared
It’s almost impossible to prepare for every possible expense. Luckily, there are some steps you can follow to help you manage surprise costs.
First, begin contributing to an emergency fund as soon as possible. Set this money aside specifically for unexpected expenses.
When you create your budget, consider costs that might arise in the future. For instance, do you have office equipment that isn’t reliable? It might need to be replaced at some point. Or, maybe you’re thinking of hiring an employee who'll need training or a license, in addition to their salary.
Allocate a small amount of your overall budget, such as 1 percent, to cover these unexpected scenarios. For all business expenses, no matter how small, you should hold onto your receipts for three years. Receipts and other records will be vital if you undergo an audit.
By following these steps, you can make sure that surprise expenses are an annoyance and not a major setback.
These terms are sometimes used interchangeably, but they have different meanings. An expense is an amount paid for something that you've already used, or that has no future value. Examples include office supplies and meals.
An expenditure is an amount spent on something that you haven't used or consumed yet. If you purchase equipment to use in the future, the cost is considered an expenditure.