Table of Contents
Allowable expenses, also known as deductible expenses, are costs that businesses can subtract from their total income to calculate their taxable profit. On the other hand, disallowable expenses are costs that cannot be deducted for tax purposes. Let’s explore both types of expenses in more detail.
Allowable Expenses
Cost of Goods Sold (COGS)
Expenses directly associated with the production or acquisition of goods sold by the business, including raw materials, direct labor, and manufacturing overhead.
Employee Salaries and Benefits
Wages, salaries, bonuses, commissions, and other forms of compensation paid to employees for their work, as well as employer contributions to employee benefit plans such as health insurance and retirement plans.
Rent and Lease Payments
Payments made for renting or leasing business premises, equipment, machinery, vehicles, or other assets used in the business operations.
Utilities and Office Expenses
Costs associated with maintaining and operating business premises, including utility bills (electricity, water, gas), office supplies, postage, and cleaning services.
Insurance Premiums
Premiums paid for various types of business insurance, such as property insurance, liability insurance, business interruption insurance, and professional indemnity insurance.
Professional Services
Fees paid to accountants, attorneys, consultants, and other professional service providers for services rendered to the business.
Advertising and Marketing
Expenses related to promoting the business and its products or services, including advertising campaigns, website development, social media marketing, and promotional materials.
Travel and Entertainment
Costs associated with business travel, including transportation, accommodation, meals, and entertainment expenses incurred while traveling for business purposes.
Depreciation and Amortization
The gradual allocation of the cost of assets over their useful lives, including depreciation for tangible assets such as machinery and equipment, and amortization for intangible assets such as patents and copyrights.
Disallowable Expenses
Personal Expenses
Costs incurred for personal purposes, such as groceries, clothing, residential rent or mortgage payments, and personal entertainment, are generally not deductible as business expenses.
Capital Expenditures
Costs incurred to acquire or improve long-term assets, such as land, buildings, machinery, and vehicles, are typically not deductible as expenses but may be depreciated or amortized over time.
Fines and Penalties
Expenses related to fines, penalties, or legal settlements imposed by government entities or legal authorities for violations of laws or regulations are generally not deductible.
Political Contributions
Contributions made to political candidates, parties, or political action committees are generally not deductible as business expenses.
Excessive Employee Compensation
Payments made to employees that are considered excessive or unreasonable in relation to the services provided may be disallowed as deductible expenses.
It’s crucial for businesses to understand the distinction between allowable and disallowable expenses and to maintain accurate records of all expenses to support their tax deductions. Consulting with a tax professional or accountant can help ensure compliance with tax laws and regulations and optimize tax planning strategies.
Stay informed, stay compliant.
