What Can You Mark as a Corporate Expense?
Corporate expenses are deemed as anything that's related to the cost of doing business. There are two different reasons to define what corporate expenses are: one is for the determination of net income, and the other is for taxes in the determination of allowable deductions. If you want to run an efficient business, it's important to know what goes into the determination of both.
Common corporate expenses are the cost of goods sold, insurance, labor, marketing, interest and rent, to name a few. Certain expenses, such as the cost of inventory, are considered direct costs, meaning they can be directly related to a particular sale. Other expenses are considered operational and are labeled as either indirect or shared. That is, they cannot be directly associated with the sale of any particular unit, but they are necessary for normal business operations.
The type of corporate expense also depends on the type of business. For example, interest expense for a bank or financial institution is considered an operating expense because it is associated with the main activities of the bank.
Expenses that fall under the banner of inventory must be estimated based on a certain inventory valuation method. The most common are last-in, first-out, or LIFO, and first-in, first out, or FIFO. LIFO assumes the last inventory purchased is the first to be sold; FIFO assumes the first inventory purchased is the first to be sold. In periods of rising prices, LIFO will always create a lower net income, and FIFO a higher net income. Either way, due to the effects of inventory valuation methodology on net income, the Internal Revenue Service requires a company to use the same reporting methodology for accounting and tax purposes.
Depreciation is also considered a corporate expense, but it is a non-cash accounting transaction used only to maintain the value of assets as they are used over time. There are several methods used to estimate the amount of depreciation that can be considered a corporate expense. The most popular methods are straight-line, accelerated and Modified Accelerated Cost Recovery System, or MACRS, which is a depreciation system published by the Internal Revenue Service.
Some expenses can be capitalized, or treated as depreciable assets. These are business start-up costs, business assets such as equipment, roads, driveways, tools, machinery parts and even the system used to heat and cool your office. Improvements in property are also considered capitalized corporate expenses.
Personal expenses are not considered corporate expenses and generally include anything used for home or family. If a portion of an expense is used for both personal and business expense, you can only count the portion used for business as a business or corporate expense.