Business Expenses and Sole Proprietorship Expenses

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What is a Business Expense?

Business expenses are cost items that cover the expenditures made by a company to sustain its operations. These expenses are necessary for a business to continue its daily operations, manage production or service processes, and maintain profitability. According to tax laws, for an expense to be considered a business expense, it must be directly related to generating business income.

Business expenses play a crucial role in accounting because proper classification and record-keeping help businesses clearly see their financial status. Moreover, accurately recording expenses allows companies to benefit from tax advantages and optimize their costs.

Business expenses are generally categorized into two types:

Fixed Expenses: Regular payments such as rent, insurance, and license fees, which remain constant regardless of the company's operations.

Variable Expenses: Costs such as raw material purchases, energy consumption, and employee salaries, which fluctuate depending on business activities.

Expense Categories for Businesses

Regardless of the type of company, businesses incur annual and monthly expenses. These are classified into legally accepted expenses and non-deductible expenses.

Legally Accepted Expenses

Meal Expenses: Expenses for business meetings and client hospitality can be recorded as business expenses. Employee meal costs are also considered an expense and should be documented through cash payments, meal cards, or invoices.

Travel Expenses: Business travel expenses, including airfare, bus tickets, hotels, and parking fees, can be considered deductible. However, personal travel expenses do not fall under this category.

Vehicle Expenses: Fuel, insurance, maintenance, and rental costs of vehicles used for business purposes can be deducted from taxes within certain limits.

Communication Expenses: Phone, internet, and other communication costs used for business purposes can be recorded as expenses.

Clothing Expenses: Work-specific clothing such as uniforms, helmets, and overalls are considered business expenses. However, personal clothing purchases are not included.

Office and Workplace Expenses: Rent, electricity, water, gas, and internet costs of the workplace can be recorded as expenses.

Advertising and Promotion Expenses: Expenses related to business marketing and promotional activities are deductible.

Legal and Financial Consulting Expenses: Fees paid to lawyers and accountants can be recorded as business expenses.

Training and Consultancy Expenses: Educational and consultancy services aimed at employees' professional development can be considered deductible expenses.

Non-Deductible Expenses

• Food and grocery expenses unrelated to business

• Travel expenses for family and friends

• Fuel and maintenance costs of personal vehicles not used for business

• Personal phone and internet bills of employees

• Personal clothing items such as shirts, ties, and watches

• Personal health and insurance expenses unrelated to business

Tax-Deductible Expense Categories

Rent Expenses: Office or workplace rent payments can be recorded as expenses. Office maintenance fees are also included in deductible expenses.

Personnel and Insurance Expenses: Employee salaries, insurance premiums, meal and transportation allowances, medical and prescription expenses.

Vehicle and Transportation Expenses: Fuel, repair, maintenance, and insurance costs of vehicles used for business can be deducted at specific rates. For rented passenger vehicles, up to 37,000 TL per month can be recorded as an expense. For purchased passenger vehicles, up to 990,000 TL of VAT and SCT can be deducted. A maximum of 70% of passenger vehicle expenses can be recorded as a business expense.

Office Supplies and Equipment Expenses: Computers, furniture, phones, stationery, and decoration costs can be recorded as expenses.

Electricity, Water, Internet, and Phone Expenses: Utility bills documented with invoices, such as electricity, water, heating, phone, and internet, can be recorded as expenses. Home office workers can deduct the proportionate portion of these costs related to business use.

Training and Consultancy Expenses: Educational and consultancy services (legal, financial, strategic) that contribute to business development and professional growth can be recorded as expenses.

Advertising and Marketing Expenses: Digital advertising, promotions, and marketing activities can be recorded as deductible expenses.

Expense Tracking and Accounting

Businesses usually work with accountants or use the e-Ledger declaration system to track and properly account for expenses. When recording expenses, it is essential to ensure that all documents are complete and official.

• Select the "Add Expense" option in the Accounting Information section.

• Enter document details and specify the type of expenditure.

• Select Expense Items and Purchase Type.

• Choose "Expenses Related to Freelance Income" or "Deductible Expenses" as the Expense Record Type. Complete the registration process and account for the expense.

Tax Benefits and Proper Expense Documentation

To benefit from tax advantages, expenses must fall within legal limits and be directly related to the business’s operations. Incorrect expense claims may result in tax penalties.

Points to Consider

• Meals with family and friends, as well as unrelated grocery purchases, cannot be claimed as expenses.

• Vacations and travel with family, spouse, or friends cannot be recorded as business trips.

• Expenses for vehicles that are neither registered nor rented under the company’s name cannot be deducted from taxes.

• Personal phone and internet bills of employees cannot be recorded as business expenses.

Common Mistakes in Expense Reporting

Recording Expenses Without Receipts or Invoices

To be recorded as a business expense, transactions must be documented with valid receipts or invoices. However, some businesses may try to claim undocumented expenses, which can lead to issues during tax audits and potential penalties. During audits, undocumented expenses may be rejected.

Misclassifying Personal Expenses as Business Expenses

Business owners and executives sometimes attempt to classify personal expenses as business expenses. Examples include personal dining, vacations, or shopping costs charged to the company account. This practice violates tax regulations, distorts financial statements, and may be considered tax evasion. If detected during a tax audit, it can result in severe financial penalties.

Recording Depreciable Assets as Immediate Expenses

Large-value assets that businesses will use long-term (e.g., machinery, vehicles, computers) cannot be recorded as immediate expenses. Instead, these assets should be depreciated over time and expensed at an annual rate. Some businesses mistakenly expense such items all at once, leading to incorrect financial statements and improper use of tax benefits.

Conclusion

Properly tracking and accounting for business expenses provides significant advantages in financial management. To maximize tax benefits, expenses must be legally compliant and well-documented. Incorrect expense declarations can lead to tax penalties, so business owners must carefully manage these processes.

A solid accounting system and accurate expense recording strengthen a business's financial structure and ensure long-term success. To benefit from tax advantages, all expenses must be supported by official documents, and receipts and invoices must be preserved. In small businesses, such as sole proprietorships, properly accounting for expenses like rent, transportation, office equipment, and employee salaries helps regulate cash flow and optimize tax burdens.