What is a Business Expense?

Simply Blog!

January 25, 2022

What is a Business Expense?

by Marley JD Watkins

“Many of our clients think like people, not corporations. We have found the biggest difference in this mentality – and missed opportunity – is when it comes to expenses.”

Let’s tackle the million-dollar question, “What is a business expense?” Correctly understanding business expenses may be the most important, yet least grasped skill for many individuals, small businesses and their teams. To correctly understand business expenses, you need to think like a CEO of a corporation and not an ordinary person. What’s the difference? Well, for starters -- People earn income, Businesses generate revenue. Revenue less expenses equals profit and, of course, profit is the name of the game for any business. Revenue and income are fixed numbers and are what they are, but expenses, and therefore profit - well, those are changing variables. Leading us to another major difference between people and businesses - People get taxed on income (set in stone) while Businesses gets taxed only on profit (variable). Once you understand this equation it is plain to see, business expenses not only affect your profit but also your tax liability.

Expenses and more importantly, qualified business expenses (“QBE”) are often misunderstood and therefore underused tools for small business owners, entrepreneurs, professional athletes, and entertainers. Now, you may be wondering, do I actually have QBEs? The answer is almost certainly a resounding YES! Let’s look at some facts. If you have your own business or you yourself are a brand, you spend all day, every day, promoting your business and/or your personal brand. You are your own CEO and CMO (Chief Marketing Officer).

Therefore, any activity or expense incurred in promoting your business and personal brand IS A QUALIFIED BUSINESS EXPENSE. Dinners, Transportation, Wardrobe, Mortgage (see below). All qualified business expenses.

We know what you’re thinking. Surely, they don’t mean ANY activity, right? Yes, any activity or expense incurred in promoting your business and personal brand is a QBE. This doubt is exactly why the mindset is so important. Corporations get it, you should do. BUT, before you can take advantage of QBEs you MUST have proper corporate structuring in place. Without that, it’s true, this is all impossible and all this information is useless. Without corporate structuring, your home is just a home. With the right structing in place, your home (which should be placed into an LLC) is corporate housing. Same home, but with the right structure in place, a big difference when it comes to tax implications and expenses. Your car isn’t your car it’s a company perk for a hard-working CEO. Your dinner and drinks with friends are business development efforts. Your gym membership is a company perk for health and wellness. The list goes on and on.

This mental shift is arguably the biggest difference between the CEO’s of the Fortune 500 companies and the average small business owner, entrepreneur, professional athlete and entertainer. Fortune 500 CEOs know this. They have teams of lawyers and accountants whose sole job is to ensure they capture every expense under the correct LLC or corporate structure. Why do think Amazon pays no taxes? Why do the top 100 companies in America pay zero taxes? Why does the average person (probably you!) have a higher tax burden than most billionaires? It’s not because you make more money or spend less, it is all about the mindset, knowledge, and structure.

Moral of the story - it is important to not only think like a CEO but to act like one. The first step is to make sure you have the correct structures in place to turn all your expenses into qualified business expenses. Once you take that crucial first step you will see how almost your entire life can be considered a business expense. So, the next time you go clothes shopping, think about how the money you’re spending should be considered “advertising” and not merely a “wardrobe”. But first, you need the structure!

Simply Structure, LLC is a boutique consulting company focusing on providing Efficient Corporate Structuring to small businessowners, high net worth individuals, entrepreneurs, professional athletes and entertainers. With our structuring strategies, our clients can improve their CORE 4 business goals which are: 1) Maximizing profits, 2) Preserving wealth, 3) Protecting assets and 4) Minimizing liabilities.

Visit us at www.simplystructure.com or LinkedIn. Prefer the phone? Give us a call at (347) 544-2305 to make sure you have the correct corporate structurein place.

© Simply Structure, LLC Brooklyn, New York.

*Simply Structure, LLC and its affiliates do not provide tax or accounting advice. This material has been prepared for informational purposesonly, and is not intendedto provide, and should not be reliedon for, tax or accounting advice. You should consult your own tax and accounting advisors before engaging in any transaction.