How to classify your business expenses

[biggie2]

I have an excel spreadsheet that I use to manage my expenses. I'm curious to know what categories the following expenses would go under.

1. monthly web hosting
2. monthly invoicing software web app (freshbooks)
3. photoshop magazine subscriptions
4. scripts that i buy

[Sagewing]

It depends on how your are going to prepare your taxes at the end of the year and what your filing status is. A sole proprietor doesn't file in the same way a corporation does, etc.

[PappaJohn]

Speaking in terms of US tax law:

A sole proprietor doesn't file in the same way a corporation does, etc.

While this is true, the organizational form a business takes (ie: sole-proprietorship, corporation, etc) does not impact the categorization of expenses. But rather (in some cases) how / where those expenses are reported.

1 monthly web hosting
2 monthly invoicing software web app (freshbooks)

There are no official, pre-defined categories for these expenses. A category such as "Service Fees" would do. This would then be reported in the "Other Expenses" section of the tax return.

3 photoshop magazine subscriptions

"Dues & Publications" is the common category used for this type of expense

4 scripts that i buy

This depends on your purpose for buying the scripts.

If these are scripts purchased for use in your own business, then they must be treated as capital assets, and "depreciated" over a number of years (generally). This is a complex topic with quite a few complicated rules, options and elections, as well as very specific guidelines. Depending on the total cost involved, the options chosen regarding depreciation can significantly impact your taxable income in the current year as well as future years.

If these scripts are purchased for resale to your customers, they should be included in "Purchase for Resale". If they are integrated into a solution you build for a customer, "Materials Purchased" would be a more appropriate category. Both of these categories would be reported in the "Cost of Goods Sold" section of the tax return.

[biggie2]

I'm a sole proprietor by the way in the US. Thanks for the tips. I imagine all of these expenses would be considered "other" as well?

If anyone ran into a decent article that talks about common business expense categories for (web design) freelancers, I'd love to read it and educate myself!

[PappaJohn]

In which case, you'd be reporting your income/expenses on Schedule C of Form 1040. The "Service Fees" and "Dues & Publications" would both be 'Other Expense' items. There is a line for 'Depreciation', which is calculated on Form 4562. There are also lines indicated for 'Purchase for Resale' and 'Materials Purchased'.

Although not the most interesting reading, the IRS does have free publications available for download which can help. Here are a couple which may be of interest.

http://www.irs.gov/pub/irs-pdf/p334.pdf
http://www.irs.gov/pub/irs-pdf/p587.pdf

[Sagewing]

While this is true, the organizational form a business takes (ie: sole-proprietorship, corporation, etc) does not impact the categorization of expenses. But rather (in some cases) how / where those expenses are reported.

I guess you could take that perspective, but just about any bookkeeper or CPA will want their clients to keep the books in a way that facilitates good tax preparation. Some expenses are easy, like heath insurance expenses which might be under the same account for various entities regardless of whether they are deductible. Subscriptions are similar, but purchase of software licenses and fees for application use can be more complex.

This boils down to the same old impasse. If you are a sole proprietor doing your own taxes it's not likely that these things matter much. When you start making more serious money and need a CPA to optimize your earnings, it makes a big difference.

[PappaJohn]

Well, I've owned and operated a Tax Accounting firm for over 30 years. According to US tax law, a given expense item would be categorized the same way regardless of the organizational form of the business.

In *some* case, the tax treatment of an item may vary from organizational type to organizational type, but that is another, far more complex discussion.

[biggie2]

how bout the purchase of stock photos?

[shadowbox]

If these are scripts purchased for use in your own business, then they must be treated as capital assets, and "depreciated" over a number of years (generally).

Surely it would depend on the licence of the software. If it were non-transferable (i.e. licence cannot be sold on to another party), then it could be argued that it is not a capital asset; it cannot depreciate as it can never actually be sold.

[mobyme]

Surely it would depend on the licence of the software. If it were non-transferable (i.e. licence cannot be sold on to another party), then it could be argued that it is not a capital asset; it cannot depreciate as it can never actually be sold.

That's the way it works in the UK. I know that the original poster is operating in the USA but thought I would add this as information for anybody in the UK who might have a similar query.

[KMH Tom]

This depends on your purpose for buying the scripts.

If these are scripts purchased for use in your own business, then they must be treated as capital assets, and "depreciated" over a number of years (generally). This is a complex topic with quite a few complicated rules, options and elections, as well as very specific guidelines. Depending on the total cost involved, the options chosen regarding depreciation can significantly impact your taxable income in the current year as well as future years.