How to Classify Corporate Expenses for Efficient Financial Management?

Why Proper Corporate Expense Classification Improves Business Operations – and Provides Relief During Tax Season

By finding the right strategy and tools for managing your expenses, you can sidestep frustrating problems, optimize your processes, and stay compliant.

Learning how to classify business expenses effectively isn't the most glamorous aspect of business strategy. But it can pay dividends in terms of saving costs and creating a more efficient financial management structure for your business. 

Categorization has a major impact on federal tax deductions and financial planning. By tracking business expenses such as vehicle use or home office creation, it becomes possible to lower your tax burden, whether you work for a larger corporation or a startup.

With that in mind, let's take a closer look at what you need to know about classifying corporate expenses.

Distinguishing Between Corporate Expenses, Costs and Investments

While capital expenditures depreciate over time, regular business expenses can typically be deducted in the current tax year. It's important to realize that expenses must be linked to the intention to generate profits. 

Let's review some primary classification methods:

Fixed vs. Variable Expenses

The key thing to remember here is the relationship to the business activity. This determines how it is classified.

Fixed expenses are those which remain consistent. A few examples include office rent, employee salaries, memberships to professional groups, loan payments, and insurance premiums.

Variable expenses often fluctuate along with business activities. Some common examples of variable expenses include sales commissions, shipping costs, raw material or manufacturing costs, and travel costs.

Operational Expenses vs. Administrative Expenses 

If you want to optimize your tax deductions and better understand how costs are structured, this distinction is important. Simply put, admin expenses are those that go to support the general management of a firm. This could include office supplies, equipment, business insurance, legal and accounting services, SaaS subscriptions, worker benefits, bank fees, and more.

Operational expenses, on the other hand, are directly related to production. They include spending on things such as labor costs, manufacturing overhead, storage and shipping costs, maintenance of equipment, raw materials and insurance related to production.

Regular vs. Extraordinary Expenses

It's important to get a grasp of expense frequency, which helps to optimize your tax planning and budgeting.

Regular expenses are those which are deemed "ordinary and necessary." They include spending on payroll, utilities, supplies, insurance premiums, professional services, and maintenance. 

Extraordinary expenses are exactly like they sound -- expenses that are not ordinary, but one-time or irregular. These may include emergency repairs, major one time equipment buys, costs related to business expansion, moving expenses, and startup costs (although these are capped).

How to Use Technology For Expense Management Challenges 

Advanced expense management solutions, like those offered by SAP Concur, make it simple to optimize classification by offering a suite of essential features. Businesses need an easy and comprehensive way to automate their expense classifications, which can not only save time and money, but also reduce errors. Expense tracking in real time also reduces administrative headaches and ensures accuracy and transparency.

The ability to detect fraud and monitor for policy compliance are also major advantages conferred by a modern expense management solution. Streamlined approvals improve efficiency, and easy integration with existing systems (such as accounting software) are another key benefit.

Your Implementation Strategy

What's the best way to implement a new and better approach to classifying and managing expenses? First, you'll want to ensure that you have detailed, accurate records and meet all federal documentation requirements. This is the foundation on which to build. Everyone should also be trained on how to keep receipts and any supporting documentation related to expenses -- a strong and transparent paper trail. It's also important to distinguish between business and personal use spending, document the business purpose for expenses and -- if possible -- automate things like receipt management.

Managing categories to ensure they are in line with requirements is another important step. Establish clear procedures for classifying expenses, undertake frequent reviews of all your categorization, and maintain thorough records. Everything should be audit ready. It's also smart to stay ahead of the curve by monitoring tax law changes, so your organization does not make an error based on outdated knowledge.

Next, remember to establish compliance guidelines and spending caps. Savvy organizations also do things such as defining their approval processes, training their employees in expense management processes, and undergoing policy reviews as needed.

Common Challenges and Their Related Solutions

Organizations often face many of the same challenges within broader expense management. It's not unusual to see personal and business expenses getting mixed up, categorization not being consistently followed, and document gaps. Compounding these challenges are somewhat complex (and usually evolving) tax requirements.

Fortunately, it's relatively straightforward to solve these persistent issues. Separating business and personal accounts, using an automated tool for digital receipts, and well-defined category definitions all go a long way to keeping in compliance.

The benefits of good classification are myriad. By doing it correctly, you can maximize your tax reductions, ensure that you are ready for an audit at all times, improve your cost control, gain deeper insight into organizational finances, create more accurate budgets, simplify your tax prep burden and improve overall financial planning. Essentially, you can add profound value across the entire system by optimizing each individual element -- and that becomes possible with the right technological solution.

There is an important caveat: Classification structures must be compliant with requirements set by your local taxing authorities. If you need additional clarity or have any issues, a consultation with tax professionals can help you ensure your classifications continue to satisfy your operational needs while staying on the right side of regulatory requirements.

Your Next Move

Now that you’ve read this primer on how to classify business expenses, a smart implementation strategy for tax-compliant classification methods should be your goal. SAP Concur can help you get started better managing expenses, and improving financial control. 

Reach out to learn how SAP Concur solutions can help you transform your company’s expense management, or visit us online.