expenses in business plan

How much does it cost to start a business?

8 min. read

Updated March 4, 2024

What will it cost to start your business? This is a key question for anyone thinking about starting out on their own. You’ll want to spend some time figuring this out so you know how much money you need to raise and if you can afford to get your business off the ground on your own. Most importantly, you’ll want to figure out how much cash you’re going to need in the bank to keep your business afloat as you grow your sales during the early days of your business. 

Typical startup costs can vary depending on whether you’re operating a  brick-and-mortar store, online store, or service operation . But a common theme is that launching a successful business requires preparation. And while you may not know exactly what those expenses will be, you can and should begin researching and estimating what it will cost to start your business.

• How to determine your startup costs

Like when developing your  business plan , or  forecasting  your initial sales, it’s a mixture of  market research ,  testing , and informed guessing. Looking at your competitors is a good starting point. Once you feel your initial estimates are in the ballpark, you can start to get more specific by making these three simple lists.

1. Startup expenses

These are expenses that happen before you launch and start bringing in any revenue. Here are some examples:

• Permits and Licenses: Every business needs a license to operate, just like a driver needs one to hit the road. Costs vary depending on your industry and location.
• Legal Fees: Getting your business structure set up (sole proprietorship, LLC, etc.) might involve consulting a lawyer and at least will involve the basic business formation fees.
• Insurance: Accidents happen, and insurance protects your business from unforeseen bumps.
• Marketing and Branding: This is how you spread the word about your product or service. It could involve website creation, business cards, or social media promotion.
• Office Supplies : Pens, paperclips, that all-important stapler – the essentials to keep your business humming.
• Rent/Lease: If you need to rent space for your business before you start selling, include those expenses in your list as well.

2. Startup assets

Next, calculate the total you need to spend on assets to get your business off the ground. Assets are larger purchases that have long-term value. They’re typically significant items that you could resell later if you needed or wanted to. Here are a few examples:

• Equipment:  Think ovens for a bakery, cameras for a photography business, or computers for a tech startup.
• Inventory:  If you’re selling products, you’ll need to stock up before opening your doors (or your online store).
• Furniture and Decorations:  Desks, chairs, that comfy couch in the waiting room – creating a functional and inviting workspace might involve some upfront investment.
• Vehicles: If your business requires a vehicle to deliver your product or service, be sure to account for that purchase here.

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Why separate assets and expenses?

There’s a reason that you should separate costs into assets and expenses. Expenses are deductible against income, so they reduce taxable income. Assets, on the other hand, are not deductible against income.

By initially separating the two, you potentially save yourself money on taxes. Additionally, by accurately accounting for expenses, you can avoid overstating your assets on the balance sheet. While typically having more assets is a better look, having assets that are useless or unfounded only bloats your books and potentially makes them inaccurate. 

Listing these out separately is good practice when  starting a business  and leads into the final piece to consider when determining startup costs. 

3. Operating Expenses

Finally, figure out what it’s going to cost to keep your doors open until sales can cover expenses. Create a list that estimates monthly expenses, such as:

• Payroll (including your own salary)
• Marketing and advertising
• Loan payments
• Insurance premiums
• Office supplies
• Professional services
• Travel costs
• Shipping and distribution

Then, based on your revenue forecasts , calculate how many months it will take before your sales can cover all those monthly expenses. Multiply that number of months by your monthly operating expenses to determine how much you’re going to need to cover operating expenses as your business starts.

This number is often called “ cash runway ” and is a critical number – you need enough cash to fund those early red ink months. This number is how much cash you need to have in your checking account when you open your doors for business.

Calculating how much startup cash you need

To figure out how much money you need to start your business, add the asset purchases, startup expenses, and operating expenses over your cash runway period. This is your total startup costs, and it’s better to overestimate than underestimate these costs.

It often makes sense to invest the time to build a slightly more detailed starting costs calculation. Assuming you start making some sales and those sales grow over time, your revenue will be able to help pay for some of your operating expenses. Ideally, your sales contribute more and more over time until you become profitable.

To do a more detailed calculation, you’ll want to invest the time in a detailed financial forecast where you can experiment with different scenarios. If you do this, you’ll be able to see how much it will cost to start your business with different revenue growth rates. You’ll also be able to experiment with different funding scenarios and what your business would look like with different types of loans.

• Funding Starting Costs

You can cover starting costs on your own, or through a combination of loans and investments.

Many entrepreneurs decide they want to raise more cash than they need so they’ll have money left over for contingencies. While that makes good sense when you can do it, it is difficult to explain that to investors. Outside investors don’t want to give you more money than you need, because it’s their money.

You may see experts who recommend having anywhere from six months to a year’s worth of expenses covered, with your starting cash. That’s nice in concept and would be great for peace of mind, but it’s rarely practical. And it interferes with your estimates and dilutes their value.

Of course, startup financing isn’t technically part of the starting costs estimate. But in the real world, to get started, you need to estimate the starting costs and determine what startup financing will be necessary to cover them. The type of financing you pursue may alter your startup or ongoing costs in a given period, so it’s important to consider this upfront.

Here are common financing options to consider:

• Investment : What you or someone else puts into the company. It ends up as paid-in capital in the  balance sheet . This is the classic concept of business investment, taking ownership in a company, risking money in the hope of gaining money later.
• Accounts payable : Debts that are outstanding or need to be paid after a certain time according to your balance sheet. Generally, this means credit-card debt. This number becomes the starting balance of your balance sheet.
• Current borrowing : Standard debt, borrowing from banks,  Small Business Administration , or other current borrowing.
• Other current liabilities : Additional liabilities that don’t have interest charges. This is where you put loans from founders, family members, or friends. We aren’t recommending interest-free loans for financing, by the way, but when they happen, this is where they go.
• Long-term liabilities : Long-term debt or long-term loans.
• Other considerations for estimating startup costs

Pre-launch versus normal operations

With our definition of starting costs, the launch date is the defining point. Rent and payroll expenses before launch are considered startup expenses. The same expenses after launch are considered operating or ongoing expenses. And many companies also incur some payroll expenses before launch — because they need to hire people to train before launch, develop their website, stock shelves, and so forth.

The same defining point affects assets as well. For example, amounts in inventory purchased before launch and available at launch are included in starting assets. Inventory purchased after launch will affect  cash flow , and the balance sheet; but isn’t considered part of the starting costs.

So, be sure to accurately define the cutoff for startup costs and operating expenses. Again, by outlining everything within specific categories, this transition should be simple and easy to keep track of.

Your launch month will likely be the start of your business’s fiscal year

The establishment of a standard fiscal year plays a role in your analysis. U.S. tax code allows most businesses to manage taxes based on a fiscal year, which can be any series of 12 months, not necessarily January through December.

It can be convenient to establish the fiscal year as starting the same month that the business launches. In this case, the startup costs and startup funding match the fiscal year—and they happen in the time before the launch and beginning of the first operational fiscal year. The pre-launch transactions are reported as a separate tax year, even if they occur in just a few months, or even one month. So the last month of the pre-launch period is also the last month of the fiscal year.

• Aim for long-term success by estimating startup costs

Make sure you’ve considered every aspect of your business and included related costs. You’ll have a better chance at securing loans, attracting investors, estimating profits, and understanding the cash runway of your business.

The more accurately you layout startup costs and make adjustments as you incur them, the more accurate vision you’ll have for the immediate future of your business. 

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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Free Financial Templates for a Business Plan

By Andy Marker | July 29, 2020

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In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .

Financial Plan Templates

Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders

Business Financial Plan Template

Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.

Download Financial Plan Template

Word | PDF | Smartsheet

Financial Plan Projections Template for Startups

This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.

‌ Download Startup Financial Projections Template

Excel | Smartsheet

Income Statement Templates for Business Plan

Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.

Pro Forma Income Statement/Profit and Loss Sample

Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.

‌ Download Pro Forma Income Statement Sample - Excel

Small Business Profit and Loss Statement

Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.

‌ Download Small Business Profit and Loss Template - Excel

3-Year Income Statement Template

Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.

Download 3-Year Income Statement Template

For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”

Cash Flow Statement Templates for Business Plan

Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.

Simple Cash Flow Template

Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.

Download Simple Cash Flow Template

12-Month Cash Flow Forecast Template

Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.

‌ Download 12-Month Cash Flow Forecast

3-Year Cash Flow Statement Template Set

Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.

Download 3-Year Cash Flow Statement Template

For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”

Balance Sheet Templates for a Business Plan

Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.

Small Business Pro Forma Balance Sheet

Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.

Download Pro Forma Balance Sheet Template

Monthly and Quarterly Balance Sheet Template

Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.

Download Monthly/Quarterly Balance Sheet Template - Excel

Yearly Balance Sheet Template

Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.

Download Yearly Balance Sheet Template - Excel

For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”

Sales Forecast Templates for Business Plan

Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.

Basic Sales Forecast Sample Template

Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. 

Download Basic Sales Forecast Sample Template

12-Month Sales Forecast Template for Multiple Products

Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.

Download 12-Month Sales Forecasting Template for Multiple Products

3-Year Sales Forecast Template for Multiple Products

Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.

Download 3-Year Sales Forecast Template - Excel

For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”

Break-Even Analysis Template for Business Plan

A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.

Break-Even Analysis Template

Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.

Download Break-Even Analysis Template

For additional resources, visit, “ Free Financial Planning Templates .”

Business Budget Templates for Business Plan

These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.

Startup Budget Template

Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.

Download Startup Budget Template

Small Business Budget Template

This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.

Download Small Business Budget Template

Professional Business Budget Template

Established organizations will appreciate this customizable business budget template, which  contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts. 

‌ Download Professional Business Budget Template

For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”

Other Financial Templates for Business Plan

In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.

Startup Funding Requirements Template

This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.

Download Startup Funding Requirements Template - Excel

Personnel Plan Template

Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure. 

Download Personnel Plan Template - Excel

Elements of the Financial Section of a Business Plan

Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. 

Below, you’ll find a quick overview of the components of a solid financial plan.

• Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
• Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
• Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
• Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
• Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
• Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
• Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.

Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan  here . 

Visit this  free non-profit business plan template roundup  or download a  fill-in-the-blank business plan template  to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to  Microsoft Excel ,  Microsoft Word , and  Adobe PDF  business plan templates. Read our articles offering  startup business plan templates  or  free 30-60-90-day business plan templates  to find more tailored options.

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How to Create a Business Budget for Your Small Business

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A business budget estimates future revenue and expenses in detail, so that you can see whether you’re on track to meet financial expectations for the month, quarter or year. Think of your budget as a point of comparison — you run your actual numbers against it to determine if you’re over or under budget.

From there, you can make informed business decisions and pivot accordingly. For example, maybe you find that your expenses are over budget for the quarter, so you may hold off on a large equipment purchase.

Here’s a step-by-step guide for creating a business budget, along with why budgets are crucial to running a successful business.

» MORE: What is accounting? Definition and basics, explained

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How does a business budget work?

Budgeting uses past months’ numbers to help you make financially conservative projections for the future and wiser business decisions for the present. If you’ve had a few bad months and predict another slow one, you can prepare to minimize expenses where possible. If business has been booming and you’re bringing in new customers, maybe you invest in buying more inventory to satisfy increased demand.

Creating a business budget from scratch can feel tedious, but you might already have access to tools that can help simplify the process. Your small-business accounting software is a good place to start, since it houses your business’s financial data and may offer basic budgeting reports.

To create a budget in QuickBooks Online , for example, you break down your estimated income and expenses across each area of your business. Then, the software calculates figures like gross profit, net operating income and net income for you.

You can then compare actual versus projected figures side by side by running a Budget vs. Actuals report. Businesses that need more in-depth features, like cash flow forecasting or the ability to use different projection methods, might subscribe to business budgeting software in addition to accounting software.

If your small business doesn’t have access to these features or has simple financials, you can download free small-business budget templates to manually create and track your budget. Regardless of which option you choose, your business will likely benefit from hiring an accountant to help manage your budget, course-correct when the business gets off track, and make sure taxes are being paid correctly.

Why is a business budget important?

A business budget encourages you to look beyond next week and next month to next year, or even the next five years.

Creating a budget can help your business do the following:

Maximize efficiency. 

Establish a financial plan that helps your business reach its goals. 

Point out leftover funds that you can reinvest.

Predict slow months and keep you out of debt.

Estimate what it will take to become profitable.

Provide a window into the future so you can prepare accordingly.

Creating a business budget will make operating your business easier and more efficient. A business budget can also help ensure you’re spending money in the right places and at the right time to stay out of debt.

How to create a business budget in 6 steps

The longer you’ve been in business, the more data you’ll have to inform your forward-looking budget. If you run a startup, however, you’ll want to do extensive research into typical costs for businesses in your industry, so that you have working estimates for revenue and expenses.

From there, here’s how to put together your business budget:

1. Examine your revenue

One of the first steps in any budgeting exercise is to look at your existing business and find all of your revenue sources. Add all those income sources together to determine how much money comes into your business monthly. It’s important to do this for multiple months and preferably for at least the previous 12 months, provided you have that much data available.

Notice how your business’s monthly income changes over time and try to look for seasonal patterns. Your business might experience a slump after the holidays, for example, or during the summer months. Understanding these seasonal changes will help you prepare for the leaner months and give you time to build a financial cushion.

Then, you can use those historic numbers and trends to make revenue projections for future months. Make sure to calculate for revenue, not profit. Your revenue is the money generated by sales before expenses are deducted. Profit is what remains after expenses are deducted.

2. Subtract fixed costs

The second step for creating a business budget involves adding up all of your historic fixed costs and using them to reliably predict future ones. Fixed costs are those that stay the same no matter how much income your business is generating. They might occur daily, weekly, monthly or yearly, so make sure to get as much data as you can.

Examples of fixed costs within your business might include:

Debt repayment.

Employee salaries.

Depreciation of assets.

Property taxes.

Insurance .

Once you’ve identified your business’s fixed costs, you’ll subtract those from your income and move to the next step.

3. Subtract variable expenses

As you compile your fixed costs, you might notice other expenses that aren’t as consistent. Unlike fixed costs, variable expenses change alongside your business’s output or production. Look at how they’ve fluctuated over time in your business, and use that information to estimate future variable costs. These expenses get subtracted from your income, too.

Some examples of variable expenses are:

Hourly employee wages.

Owner’s salary (if it fluctuates with profit). 

Raw materials.

Utility costs that change depending on business activity.

During lean months, you’ll probably want to lower your business’s variable expenses. During profitable months when there’s extra income, however, you may increase your spending on variable expenses for the long-term benefit of your business.

4. Set aside a contingency fund for unexpected costs

When you’re creating a business budget, make sure you put aside extra cash and plan for contingencies.

Although you might be tempted to spend surplus income on variable expenses, it’s smart to establish an emergency fund instead, if possible. That way, you’ll be ready when equipment breaks down and needs replacing, or if you have to quickly replace inventory that's damaged unexpectedly.

5. Determine your profit

Add up all of your projected revenue and expenses for each month. Then, subtract expenses from revenue. You may also see the resulting number referred to as net income . If you end up with a positive number, you can expect to make a profit. If not, that’s a loss — and that can be OK, too. Small businesses aren’t necessarily profitable every month, let alone every year. This is especially true when your business is just starting out. Compare your projected profits to past profits to confirm whether they’re realistic.

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6. Finalize your business budget

Are the resulting profits enough to work with, or is your business overspending? This is your opportunity to set spending and earning goals for each month, quarter and year. These goals should be realistic and achievable. If they don’t line up with your projections, make sure to establish a strategy for making up the difference.

As time goes on, regularly compare your actual numbers to your budget to determine whether your business is meeting those goals, and course correct if necessary.

» MORE: Ways your small business can spend smarter

A business budget projects future revenue and expenses so you can create a smart, realistic spending plan. As the year progresses, comparing your actual numbers against your budget can help you hold your business accountable and make sure it reaches its financial goals.

A business budget includes projected revenue, fixed costs, variable costs and the resulting profits. You can also factor in contingency funds for unforeseen circumstances like equipment failure.

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Business expenses: definition with examples.

Business expenses are ordinary and necessary costs a business incurs in order for it to operate. Businesses need to track and categorize their expenditures because some business expenses can count as tax deductions. Deductible expenses reduce a business’s taxable income, which can result in significant cost savings.

Here’s What We’ll Cover:

What Can You Write off as Business Expenses?

Business expenses examples, can business expenses be carried forward, can i deduct personal expenses for business, types of business expenses, tips for tracking business expenses.

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

Tax deductible business expenses are ones that are considered by the Internal Revenue Service (IRS) to be both “ordinary and necessary.”

Ordinary is defined by the IRS as “one that is common and accepted in your trade or business. A necessary expense is “one that is helpful and appropriate for your trade or business.”

Not all expenses a company incurs are tax deductible. Those that are may only qualify for a partial reduction. Some companies will need to ‘ capitalize ’ a business expense.

Capitalizing an expense refers to business assets that a business invests in to generate revenue, but is also one that will depreciate over a number of years (like a building or piece of equipment).

Capitalizing large business expenses means only the depreciation amount of those items for that year will show up on a company’s income statement, unlike regular business expenses which show the full amounts. This will allow a company to accurately assess its profits.

Here are some common business expense examples that may be partially or fully tax deductible:

• Payroll (employees and freelance help)
• Bank fees and interest
• Insurance expenses
• Business vehicles
• Equipment or equipment rental
• Office supplies
• Membership dues (including union or other professional affiliations)
• Commissions & fees
• Business meals
• Business travel expenses
• Employee retirement plans
• Employee education plans
• Employee benefit programs
• Subscriptions
• Equipment rentals
• Advertising and marketing costs
• Office equipment
• Repair and maintenance costs
• Executive compensation
• Employee salaries and wages
• Interest expenses
• Shipping costs

If you operate a small business out of your home, some of your housing costs may be partially deductible:

• Home office space (as long as this is your main place of business)
• Mortgage interest
• Security system
• Property taxes
• Maintenance, repairs or upkeep
• Business phone line (separate from home line)

For example, say your home is 1,000 square feet, and you use 100 square feet (10% of the total square footage) exclusively for your home office. In that case, you can deduct 10% of the above expenses as part of the home office deduction. The remaining 90% are considered personal expenses.

Typically, a company’s business expenses are fully deductible the tax year the purchases were made. If the business expenses missed were considerable and affected a company’s taxes, the company could then choose to file an amended tax return . You have three years from the tax return due date to file an amended return and claim business expenses and get a tax refund.

In addition, business expenses that are considered to be capitalized costs (see above) will be carried forward, but the depreciation amounts will change every year. Capitalizing business expenses is standard for a new company with a lot of expensive start up costs.

No, you cannot claim personal expenses as tax-deductible business expenses. The only exception is if the costs incurred are both personal and business expenses. In that case, you can only deduct the portion of the expense that relates to business purposes.

Let’s give an example. Take John, he’s self-employed and runs his own tax consulting business. He uses his vehicle 50% of the time to visit clients in their homes or at their place of business, and 50% of the time the vehicle is used for family or pleasure. The costs of maintaining and operating the vehicle include both personal and business expenses.

The rules allow John to deduct the business portion of gas, insurance, maintenance, and repairs as deductible expenses. But to back up these business expenses on his taxes he needs to track mileage and the purpose of each trip.

There are three types of business expenses:

Fixed Expenses

A fixed cost is one that does not change or changes only slightly. An example of fixed business expenses would be the monthly rent a business pays on its headquarters.

Variable expenses vary from month to month and are typically a company’s largest expense. Examples of variable business expenses would be payroll for a company with a large amount of freelance personnel, or overtime expenditures.

Periodic expenses are ones that happen infrequently. Periodic business expenses can be hard to plan for, such as money needed for an unexpected machine replacement or repair.

Keeping track of business expenses can be a time-consuming burden for a small business owner. However, there are several ways to make this task easier and more efficient.

The following tips can help you ensure you track business expenses efficiently and effectively:

• Set up a separate business bank account. Open a business checking account and ensure all of your business-related income and expenses run through that account.
• Use business accounting software . Most business owners use accounting software to track business costs. Most modern accounting software can connect to your business bank account to automatically record expenses.
• Keep good records. Document all business spending with receipts and invoices to establish a clear paper trail in case the IRS decides to audit your taxable income.
• Review expenses regularly. It’s important for business owners to review their expenses regularly in order to stay on top of their finances. This allows them to identify areas where they can reduce operating costs to save money, spot tax deductions to lower the company’s tax liability, and make more informed decisions about how to grow their business.

By following these simple steps, business owners will always know where their business money is going, helping them make better decisions in their business and reduce their tax liability.

Janet Berry-Johnson

About the author

Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics. Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others. You can learn more about her work at jberryjohnson.com .

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Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: spending budget.

As I continue with my standard business plan financials series, I turn now to developing the spending budget. True, nobody likes budgets, but the budgeting function is one of the most important to management to keep cash in the bank; and we all know it. In standard business plan budgeting, you look for realism and credibility, with educated guesses. And the point of it is setting it down as a standard so you can track it, review it, and revise as needed.

The spending budget is also vital to projected profit and loss and projected cash flow . In the diagram here below of full financials (repeated here from three essential projections  posted previously in this series) the spending budget includes both the expenses portion of profit and loss and additional spending that doesn’t show up in profit and loss but does impact the cash flow and balance sheet.

By the way, the word budget, as I use it here, is exactly the same as forecast. The difference between the two is just custom. I could just as easily refer to revenue and spending budgets, or revenue and spending forecasts, as revenue forecast and spending budget. Most people are used to them the way I’m using them, with forecast for revenue and budget for spending.

Also, the difference between Costs and Expenses is significant. In finance and accounting, costs are the direct costs you have in your sales forecast, and expenses are operating expenses like rent, advertising, and payroll. They are not the same thing.

Finally, a special note to our LivePlan users – LivePlan has its own interface to guide you through your spending budget. That’s for a different post. All the concepts you see here are valid, and included with LivePlan – but you don’t have to build them in your spreadsheet.

Three types of spending

There are three common types of spending in a normal business. These are the things you write checks for.

• The first is costs, direct costs, what you spend on what you sell. Those are the costs you have already estimated in your sales forecast.
• The second is your expenses. They are mostly operating expenses, like rent, utilities, advertising, and payroll.
• The third is what you spend to repay debts and purchase assets. I call that “other spending.” These are important financial terms that you have to use correctly; so if you have any doubt, investigate what assets are and how debt repayment is different from interest expense, not an expense, but something that absorbs cash and affects the cash available to the business.

Let’s look first at the most common kind of spending, the operating expenses.

The Expense Budget

Make sure you understand expenses as a technical financial term. Expenses are spending like payroll and rent that aren’t part of direct costs and reduce profits and taxable income. You need to understand that difference if you are going to run a business and manage cash flow. If you have any doubts, please read up on that.

Just as you did for sales forecast and direct costs, try to always project expenses in the same categories you have in your chart of accounts. If your accounting divides marketing expenses into personnel, advertising, and PR, don’t project marketing expenses in your business plan as print, online, and social media. This is important.

Summary of Operating Expenses

Forecasting your operating expenses is a matter of experience, educated guessing, a bit of research, and common sense. Let’s look at a sample expense budget from the same bicycle business plan I used in the sales forecast section above (with middle columns cut out):

All the numbers are educated guesses. Garrett, the bicycle storeowner, knows the business. As he develops his first lean plan, he has a good idea of what he pays for rent, marketing expenses, leased equipment, and so on. And if you don’t know these numbers, for your business, find out. If you don’t know rents, talk to a broker, see some locations, and estimate what you’ll end up paying. Do the same for utilities, insurance, and leased equipment: Make a good list, call people, and take a good educated guess.

Payroll and Payroll Taxes are Operating Expenses

Payroll, or wages and salaries, or compensation, are worth a list of their own. In the case of the bike shop owner, for payroll, he does a separate list so he can keep track. Payroll is a serious fixed cost and an obligation. Garrett’s summary budget (above) has the one line for payroll but it comes from a separate list. He just takes the total into the budget. ;Here’s the list:

Notice that the totals from the Personnel Plan show up in the expense budget. And if you look closely (it may take a calculator) at the expense row “Payroll Taxes” and compare that amount to the total payroll, you’ll see that it’s an estimate based on 25 percent of payroll. Garrett uses “Payroll Taxes” as a blanket term; it includes what he spends on health insurance and other benefits.

Other spending

This is tricky: standard accounting and financial analysis include only sales, costs, and expenses in the calculation of  Profit and Loss . However, in the real world, some of what you spend isn’t included in either costs or expenses. For example, repaying a loan takes money, but doesn’t show up anywhere in the profit and loss. And if you have a product-based business and proper accrual accounting, the money you spend buying inventory doesn’t show up in the profit and loss until that inventory sells. Buying a vehicle or production equipment isn’t tax deductible and isn’t an expense; but it costs money. The rule of thumb is that all expenses are tax deductible, but not all spending is an expense.

What to do? Plan and track your operating expenses for sure. And if you need to handle loan repayments, purchasing assets, distributing profits, owners’ draw, or other spending outside of profit and loss, keep those in your spending budget. Keep track of them. Plan for them.

Understand Starting Costs

Startup costs are a special case that applies to startup businesses only. They are the sum of the assets you need to purchase before you start, plus the expenses you incur before you start. My advice on how to estimate starting costs is coming later, in a separate post.

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How To Create Financial Projections for Your Business

Learn how to anticipate your business’s financial performance

• Understanding Financial Projections & Forecasting

Why Forecasting Is Critical for Your Business

Key financial statements for forecasting, how to create your financial projections, frequently asked questions (faqs).

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Just like a weather forecast lets you know that wearing closed-toe shoes will be important for that afternoon downpour later, a good financial forecast allows you to better anticipate financial highs and lows for your business.

Neglecting to compile financial projections for your business may signal to investors that you’re unprepared for the future, which may cause you to lose out on funding opportunities.

Read on to learn more about financial projections, how to compile and use them in a business plan, and why they can be crucial for every business owner.

Key Takeaways

• Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more.
• Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to investors.
• Some of the key components to include in a financial projection include a sales projection, break-even analysis, and pro forma balance sheet and income statement.
• A financial projection can not only attract investors, but helps business owners anticipate fixed costs, find a break-even point, and prepare for the unexpected.

Understanding Financial Projections and Forecasting

Financial forecasting is an educated estimate of future revenues and expenses that involves comparative analysis to get a snapshot of what could happen in your business’s future.

This process helps in making predictions about future business performance based on current financial information, industry trends, and economic conditions. Financial forecasting also helps businesses make decisions about investments, financing sources, inventory management, cost control strategies, and even whether to move into another market.

Developing both short- and mid-term projections is usually necessary to help you determine immediate production and personnel needs as well as future resource requirements for raw materials, equipment, and machinery.

Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts. They can also be used to make informed decisions about the business’s plans. Creating an accurate, adaptive financial projection for your business offers many benefits, including:

• Attracting investors and convincing them to fund your business
• Anticipating problems before they arise
• Visualizing your small-business objectives and budgets
• Demonstrating how you will repay small-business loans
• Planning for more significant business expenses
• Showing business growth potential
• Helping with proper pricing and production planning

Financial forecasting is essentially predicting the revenue and expenses for a business venture. Whether your business is new or established, forecasting can play a vital role in helping you plan for the future and budget your funds.

Creating financial projections may be a necessary exercise for many businesses, particularly those that do not have sufficient cash flow or need to rely on customer credit to maintain operations. Compiling financial information, knowing your market, and understanding what your potential investors are looking for can enable you to make intelligent decisions about your assets and resources.

The income statement, balance sheet, and statement of cash flow are three key financial reports needed for forecasting that can also provide analysts with crucial information about a business's financial health. Here is a closer look at each.

Income Statement

An income statement, also known as a profit and loss statement or P&L, is a financial document that provides an overview of an organization's revenues, expenses, and net income.

Balance Sheet

The balance sheet is a snapshot of the business's assets and liabilities at a certain point in time. Sometimes referred to as the “financial portrait” of a business, the balance sheet provides an overview of how much money the business has, what it owes, and its net worth.

The assets side of the balance sheet includes what the business owns as well as future ownership items. The other side of the sheet includes liabilities and equity, which represent what it owes or what others owe to the business.

A balance sheet that shows hypothetical calculations and future financial projections is also referred to as a “pro forma” balance sheet.

Cash Flow Statement

A cash flow statement monitors the business’s inflows and outflows—both cash and non-cash. Cash flow is the business’s projected earnings before interest, taxes, depreciation, and amortization ( EBITDA ) minus capital investments.

Here's how to compile your financial projections and fit the results into the three above statements.

A financial projections spreadsheet for your business should include these metrics and figures:

• Sales forecast
• Balance sheet
• Operating expenses
• Payroll expenses (if applicable)
• Amortization and depreciation
• Cash flow statement
• Income statement
• Cost of goods sold (COGS)
• Break-even analysis

Here are key steps to account for creating your financial projections.

Projecting Sales

The first step for a financial forecast starts with projecting your business’s sales, which are typically derived from past revenue as well as industry research. These projections allow businesses to understand what their risks are and how much they will need in terms of staffing, resources, and funding.

Sales forecasts also enable businesses to decide on important levels such as product variety, price points, and inventory capacity.

Income Statement Calculations

A projected income statement shows how much you expect in revenue and profit—as well as your estimated expenses and losses—over a specific time in the future. Like a standard income statement, elements on a projection include revenue, COGS, and expenses that you’ll calculate to determine figures such as the business’s gross profit margin and net income.

If you’re developing a hypothetical, or pro forma, income statement, you can use historical data from previous years’ income statements. You can also do a comparative analysis of two different income statement periods to come up with your figures.

Anticipate Fixed Costs

Fixed business costs are expenses that do not change based on the number of products sold. The best way to anticipate fixed business costs is to research your industry and prepare a budget using actual numbers from competitors in the industry. Anticipating fixed costs ensures your business doesn’t overpay for its needs and balances out its variable costs. A few examples of fixed business costs include:

• Rent or mortgage payments
• Operating expenses (also called selling, general and administrative expenses or SG&A)
• Utility bills
• Insurance premiums

Unfortunately, it might not be possible to predict accurately how much your fixed costs will change in a year due to variables such as inflation, property, and interest rates. It’s best to slightly overestimate fixed costs just in case you need to account for these potential fluctuations.

Find Your Break-Even Point

The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors.

To find this number, you need to determine two things: your fixed costs and variable costs. Once you have these figures, you can find your BEP using this formula:

Break-even point = fixed expenses ➗ 1 – (variable expenses ➗ sales)

The BEP is an essential consideration for any projection because it is the point at which total revenue from a project equals total cost. This makes it the point of either profit or loss.

Plan for the Unexpected

It is necessary to have the proper financial safeguards in place to prepare for any unanticipated costs. A sudden vehicle repair, a leaky roof, or broken equipment can quickly derail your budget if you aren't prepared. Cash management is a financial management plan that ensures a business has enough cash on hand to maintain operations and meet short-term obligations.

To maintain cash reserves, you can apply for overdraft protection or an overdraft line of credit. Overdraft protection can be set up by a bank or credit card business and provides short-term loans if the account balance falls below zero. On the other hand, a line of credit is an agreement with a lending institution in which they provide you with an unsecured loan at any time until your balance reaches zero again.

How do you make financial projections for startups?

Financial projections for startups can be hard to complete. Historical financial data may not be available. Find someone with financial projections experience to give insight on risks and outcomes.

Consider business forecasting, too, which incorporates assumptions about the exponential growth of your business.

Startups can also benefit from using EBITDA to get a better look at potential cash flow.

What are the benefits associated with forecasting business finances?

Forecasting can be beneficial for businesses in many ways, including:

• Providing better understanding of your business cash flow
• Easing the process of planning and budgeting for the future based on income
• Improving decision-making
• Providing valuable insight into what's in their future
• Making decisions on how to best allocate resources for success

How many years should your financial forecast be?

Your financial forecast should either be projected over a specific time period or projected into perpetuity. There are various methods for determining how long a financial forecasting projection should go out, but many businesses use one to five years as a standard timeframe.

U.S. Small Business Administration. " Market Research and Competitive Analysis ."

Score. " Financial Projections Template ."

36 Business Expense Categories for Small Businesses and Startups

Attention to expense deductions may not play a prominent role in the financial planning process for small businesses and startups—and that may be costing them. Sure, you’re focused on customer service and improving your products and services. But some easy moves could significantly lessen your tax bill.

For example, say you’re putting 250 miles per week on your private vehicle to get products out to customers. It may seem time-consuming to keep a log separating business and personal use, but you’re losing out on close to $600 in deductions. Or maybe you shuttered your office and started running your company from a spare room. As long as the space is exclusively used for business, you can deduct $5 for every square foot, up to $1,500.

Business expenses are the costs of running a company and generating sales. Given that broad mandate, the IRS doesn’t provide a master list of allowable small-business and startup deductions. As long as an expense is “ordinary and necessary” to running a business in your industry, it’s deductible. That makes it well worth the time to organize your spending so your business takes all legitimate write-offs, creates an effective financial plan , pays the proper amount in quarterly taxes—and doesn’t need to sweat an audit.

What Is a Tax-Deductible Business Expense?

Which expenses may be written off varies depending on the nature of your business. Start by reviewing Internal Revenue Service Publication 535 , which discusses the deductibility of common business expenses and general rules for filing your taxes.

Those “ordinary and necessary” expenses must be incurred in an organization motivated by profit. Even if your small business faces financial problems and doesn’t actually generate a profit, the intent needs to be there. Otherwise, the IRS may determine your business is a hobby and disallow expenses.

The IRS also suggests distinguishing usual business expenses from categories that fall under the cost of goods sold (COGs) and capital expenses to ensure accuracy, since some business expenses cannot be deducted in the year they’re incurred.

What Are Business Expense Categories?

By developing expense categories that fit your business and recording and organizing expenditures as you go, you’ll find it easier to get all the deductions you’re due.

You’ll also save significant headaches for your bookkeeper or tax preparer. Speaking of, it’s worth spending time with a financial adviser to understand the types of expenses you can and can’t include in a specific category.

Below is an example small-business expense categories list that applies to most companies, outlining what’s included and how you can qualify for a deduction. Add to this industry-specific categories, such as R&D costs or spending to seek VC funding.

Advertising:

This covers the cost of items and services to directly promote or market your business. Examples include fees paid to advertising or marketing companies to produce promotional materials, billboards, brochures, posters, websites and social media images. You may even deduct spending on a PR campaign.

Continuing education:

This can include courses for continuing education or seminars to stay current on industry trends. Relevant materials, books and registration fees for you and your employees are tax-deductible. You can also deduct payments made to employees to reimburse them for relevant educational expenses.

Credit and collection fees:

Businesses that use accrual basis accounting, where revenue and expenses are recorded when they’re earned or incurred even if no money changes hands at that point, can deduct unpaid invoices as business bad debt. Any fees spent trying to collect on debt, such as hiring an outside company to collect what’s owed, also count. A better bet: Minimize bad debt and increase cash flow by optimizing your billing processes.

Interest paid on business loans, ongoing credit lines and business credit cards are tax-deductible expenses. Bank fees, such as monthly maintenance or overdraft fees, also count.

Dues and subscriptions:

Subscriptions to industry magazines or journals related to your business can be deducted on your taxes. Membership fees include those paid to professional or trade associations that can help promote your business and even to your local Chamber of Commerce.

Employee benefit programs:

Payments made toward benefits such as disability insurance, life insurance, dependent care assistance, health plans for you and your employees and adoption assistance are tax-deductible. Note that this is one area, along with workers’ compensation insurance, where companies tend to spend more than they need to.

Besides that workers’ compensation insurance, you can deduct premiums for business-related insurance, including for liability, malpractice and real estate. Auto insurance premiums on a personal vehicle are a bit more complicated: If you deduct a flat mileage rate, you can’t itemize and must use the actual expense method, where you determine what it actually costs to operate the car for the portion of the overall use of the car that’s business use.

Maintenance and repairs:

Companies that use fleet vehicles as part of their operations can deduct the portion used for business. Deductible expenses include parking fees and gas. Otherwise, you can choose to utilize the standard mileage rate. Additionally, repair and maintenance of other types of equipment and machinery used in your business can also count.

Under actual expenses calculations for vehicles, you may include gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments) prorated to the total business miles driven.

Legal and professional expenses:

These can include fees paid to certified public accountants (CPAs), financial planners, lawyers or other types of professionals.

Office expenses and supplies:

Items such as cleaning products, paper, notebooks, stationery and even snacks and beverages for employees can be deducted as supplies. The expenses category includes costs related to operating your business, such as website hosting and software.

Monthly telecommunications fees in a commercial space can be deducted, as can additional phone lines in a home office as well as cell phone contracts as a subcategory of office expenses.

For a commercial space, utilities such as electricity, internet, sewage and trash pickup fees are fully deductible. For a home office, you can deduct utilities in proportion to how much of your home is used for business.

Postage and shipping:

Stamps, freight and postage fees to mail business-related items, including products to customers and return shipping labels, count. Envelopes and packaging materials are included in office supplies.

Items such as ink cartridges, printers or payments for printing services can be included under this business expense category. Note that if you decide to do some direct-mail marketing, you can deduct the cost of producing the materials here, but postage must be listed separately even if the printer handled mailings.

Any rental payments made to occupy a warehouse for inventory or office space to conduct business are tax deductible. Your business structure —C corporation (C-corp) or S corporation (S-corp)—dictates whether you can pay a reasonable amount to rent property from shareholders.

Salaries and other compensation:

Employee salaries, gross wages, commissions, bonuses and other types of compensation count as tax-deductible expenses. Compensation can even extend to salaries paid to children and spouses, provided payments were made through payroll and those individuals performed services for your business. The amount paid does need to be considered reasonable.

Business-related travel expenses include flights, hotels and meals—but note that only 50% of the cost of meals for employees and customers is deductible. Costs for candidates who are traveling for an interview are deductible. Examples include parking fees and flights.

Costs include cell phone, electricity, internet, sewage and trash pickup fees (for commercial spaces).

Business meals:

You can deduct 50% of qualifying food and drink purchases. It needs to be related to the business, such as work conferences and meals on business trips. As a small business, you can deduct 50% of food and drink purchases that qualify.

Business use of your car:

You may be able to write off costs of maintaining and operating your vehicle if it’s strictly for business use. However, if it’s mixed, you can claim mileage related to the business use.

Moving expenses:

For work-related moving expenses, you may be able to deduct 100% of the costs related to your move. You will need to pass the distance test, such as your new job location being at least 50 miles from your former location.

Depreciation:

These are costs for big ticket items like machinery or a vehicle over its lifetime use, instead of it over one single tax year.

Charitable contributions:

You can deduct charitable contributions made to qualifying organizations—you may need to itemize these deductions.

Child and/or dependent care:

Qualifying costs associated with child or dependent care can be written off, though you’ll need to meet the IRS requirements.

Startup expenses:

Businesses who launched a new venture may be able to deduct up to $5,000 in startup expenses leading up your launch. Examples include marketing and employee training costs.

Mortgage interest:

If you’re purchasing a building or taking out a loan to build or improve your home for business purposes, you may be able to deduct the interest incurred.

Ones, such as bookkeeping software or recurring subscription with SaaS companies, used for business related purposes may be fully tax deductible.

Books and magazine subscriptions:

Magazine, books and journals that are specialized and directly to your business may be tax-deductible. For instance, newspapers may not be, but industry-specific magazines would.

Foreign earned income:

If you have a business based abroad you may be able to leave out any foreign income earned off your tax return, known as foreign earned income exclusion. You’ll need to meet certain requirements such as being under a certain income threshold.

Medical expenses:

Self-employed individuals, who pay for their own medical care expenses or insurance premiums, can deduct these expenses on their tax return. Examples include doctor’s fees and prescription drugs.

Licenses and permits:

Any required licenses and permits can be tax deductible. Examples include building permits and licenses to practice law in your state.

Manufacturing or raw materials:

These are directly related to the cost of goods sold or items and storage paid to sell your products.

Retirement contributions:

Contributing to a tax-advantaged account, such as an IRA or 401k, can reduce your taxable income—a great way for those who are self-employed to save on taxes.

Real estate taxes:

If you have a home office and itemize your taxes, you may be able to deduct some of the taxes you pay.

Client gifts:

Gifts for employees, clients or vendors may be fully tax deductible. For example, you give your employees gift baskets during the holiday season or send gift cards to vendors.

Employee loans:

If you pay an advance to an employee and expect them to pay you back (as in, they didn’t do any extra work to earn this “extra” income), you can deduct this amount. However, any interest paid may count as business income.

Skip the Golf?

If you have employees who frequently travel for business, ensure you follow small-business expense management best practices like making it easy for them to upload the receipts required by the IRS.

3 Steps to Categorize Expenses for Your Small Business or Startup

Poor tax compliance and inconsistent cash flow are among the top 10 financial challenges for small businesses. You can break that mold by being consistent in categorizing expenses. That allows you to see where and how much you’re spending to operate your company while being prepared come tax time.

You’ll also gather insights that will enable you to create a financial statement that adds visibility into profitability and cash flow. These statements are required for audits and are often requested by investors.

Here are three steps to categorize business expenses.

Determine correct categories for your specific business.

Choosing the right categories will depend on your industry. For example, a greeting card business may have dedicated categories for shipping and storage rental, whereas software-as-a-service ( SaaS) companies may have categories for digital services.

Start by identifying the expense categories your business uses the most—that financial statement will help here—and ones that you’ll need to grow. Refer to the list above to get started.

Reconcile and review financial accounts regularly.

Reviewing financial accounts is a good habit that will encourage you to stay on top of your expenditures. Reconciling bank statements can be easily done using accounting software. If you find you’re having challenges, a business-only credit card is a top expense management best practice.

Assign a category to all transactions.

Using the list of categories you came up with, look at your spending details and assign anything deductible. Pay particular attention to where receipts are required. Note that keeping business and personal finances separate is a top financial tip for small businesses and shields you from liability, so as you assign an expense, make sure it’s business-related.

What Else Can I Deduct as a Business Expense?

As we’ve mentioned, your home can yield many deduction opportunities, based on the percentage of space your office occupies—but you’ll need to itemize mortgage interest, utilities, insurance and property taxes. Or, you can claim the standardized deduction, which is $5 per square foot up to 200 square feet.

A few other items you may not have considered:

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain groups, including some veterans and disabled individuals, who face significant barriers to employment.

Costs to protect intellectual property created by you or your employees, such as software code, a logo for your business or a patent for a new product or service.

Losses from a natural disaster or crime. If a fire or flood destroys your stock, or items are stolen, you may deduct losses not covered by your insurance.

Use Accounting Software to Track Spending and Categorize Business Expenses

One of the easiest ways for business owners to categorize expenses and track spending is to use accounting software, which often has prepopulated business categories. You can amend or add as needed, and it will automatically compile transactions.

Accounting software also helps you to use the data from your expenses to run profit and loss reports. Doing so shows you the amount you’re spending in each category so you can assess whether you need to get your costs under control or if you’re on track. You can break down spending at specific time intervals to see how expenses change. These reports simplify the deduction process while revealing your annual business expenses.

Improve Expense Management Efficiency

Free Business Expense Worksheet

One of the most exhaustive guides to what requirements need to be met for qualifying business expenses is the IRS publication 535. However, if you want a resource that’s easier to wade through, download our free overview guide . You can review a list of common business expense categories as well as nondeductible items.

Small Business and Startup Expense FAQs

What can be written off as a business expense.

Generally, if an expense counts as ordinary and necessary to conduct business, you can deduct it as a business expense. There is no comprehensive list because what counts as “ordinary and necessary” is highly dependent on industry.

What can’t be written off as a business expense?

Any spending considered a personal expense can’t be written off. In addition, you can’t deduct expenses related to client entertainment, with the exception of meals; fines or penalties for violating a law; country club dues; and illegal payments.

Can you deduct job expenses?

As of 2018, job expenses, such as for a relocation or other costs paid by workers but not reimbursed by employers, are no longer eligible. However, if a business reimburses an employee, then the employer can deduct that reimbursement as an expense.

Can I write off my business startup costs?

Businesses can write off startup costs, depending on the type of expenditure. Allowable deductions must be directly related to getting the business up and running and organizational in nature, such as training staff and incorporation fees. You may be able to deduct up to $5,000 for startup and an additional $5,000 for organizational costs.

Can I take the standard deduction and still deduct business expenses?

Yes, you can deduct business-related expenses even if you take the standard deduction.

What are three major types of expenses?

The three major types are fixed, variable and periodic.

• Fixed expenses are those that don’t change for the foreseeable future. These can include auto lease payments or rent.
• Variable expenses are expenses such as utilities, which can change from month to month.
• Periodic expenses are ones that happen occasionally, like business travel or emergency car repairs.

Financial Management

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How to create an expense policy for your business

Creating an effective expense policy is a cornerstone of sound financial management for any business. It sets clear boundaries and expectations for employee spending, ensuring that every penny spent is aligned with company goals and values — and as a small business owner, what’s not to love about that? 

An expense policy outlines permissible expenditures and establishes a framework for compliance and transparency. But where do you start? Below, we’ll clear up any confusion and break down the six steps to creating an expense management policy for your business. Let’s dive in! 

1. Define acceptable expenses

The foundation of any expense policy is a clear definition of what constitutes an acceptable expense. Think about what your employees might need to be able to do their jobs to the best of their ability. 

Generally, acceptable expenses are necessary, reasonable, and directly related to the business's operations or goals. These often include:

Travel: Necessary airfare, accommodation, and transportation for business purposes.

Meals: Reasonable food expenses during business trips or client meetings, avoiding excessive spending.

Office supplies: Essential items required for daily operations and productivity.

Professional development: Investment in employee skills through training, courses, and conferences that benefit the business.

Remember to specify non-allowable expenses

On the other hand, non-allowable expenses are those that don't directly contribute to business objectives, are extravagant, or violate company policies. It’s important to be just as clear upfront about what isn’t reimbursable to prevent misuse of funds and maintain ethical standards. Common non-allowable expenses include:

Personal expenses: Any costs unrelated to business activities, like personal entertainment or family travel.

Excessive expenditures: Lavish spending that exceeds a reasonable standard or doesn't align with the company's financial practices.

Policy violations: Expenses that contravene company policies, legal requirements, or ethical norms, such as gifts that could be construed as bribes.

2. Set spending limits

The next step is establishing spending limits. Setting limits helps you manage the company’s budget and prevent overspending. When setting these limits, consider the nature of your business and the typical costs in your industry. Examples of spending limits include:

Daily meal allowances: Setting a reasonable cap on the amount that can be spent on meals per day.

Hotel rate ceilings: Defining the maximum rate for accommodation per night, based on travel locations.

Conference budgets: Allocating a specific amount for conference attendance, including registration fees, travel, and accommodations.

It's important to strike a balance between being too restrictive, which could hinder employee effectiveness, and too lenient, which could lead to unnecessary expenditures. Tools like Expensify can help you find the sweet spot, as they allow for real-time tracking and management of expenses — plus, with the Expensify Card , you can set smart limits to make sure your employees don’t overspend on the go.

3. Develop a procedure for submitting expenses

A well-defined procedure for submitting expenses is vital for an effective expense policy. This procedure should be straightforward, ensuring employees can easily report their expenses without confusion. Key elements of this process should include:

Receipt submission: Clearly state the requirement for submitting receipts or other proof of expenditure.

Expense report timelines: Set deadlines for reporting expenses, such as within a week of incurring the expense.

Digital submission: Encourage the use of digital tools to submit expenses and create expense reports . This streamlines the process and creates a digital record for easier tracking and auditing — simplifying the preaccounting process from start to finish.

While manual methods can work here, expense management software significantly streamlines the entire expense submission process. These tools allow for quick uploading of receipts, automatic categorization of expenses , and easy tracking of submissions, making the entire process more efficient and less prone to errors.

4. Implement an approval process

An effective company expense policy must include a clear and transparent approval process. This ensures that all expenses are reviewed and authorized before reimbursement and held to the same standard across the board. Key aspects to consider include:

Designating approvers: Identify who in the organization can approve expenses. This could be direct managers, department heads, or finance team members.

Approval criteria: Set clear criteria for approval, such as alignment with the expense policy and adherence to spending limits.

Timely response: Establish a timeframe for approval to ensure prompt processing. This helps maintain efficiency and employee satisfaction

5. Educate your employees

An expense policy is only effective if your employees understand and adhere to it, so education is key. Consider the following steps to ensure your team is well-informed:

Policy distribution: Make sure every employee has access to the expense policy, ideally in a digital format that’s easily accessible.

Training sessions: Conduct training sessions to review the policy, emphasizing key points and answering any questions.

Regular reminders: Send periodic reminders or updates about the expense policy, especially when there are changes.

Employees must understand the 'how' and the 'why' behind the policy. This fosters a sense of responsibility and alignment with the company's financial goals and ethical standards.

6. Review and update your policy regularly

An expense policy should never be static; it must evolve with your growing business. Regular reviews and updates are essential to ensure it remains relevant and effective. Consider the following:

Annual reviews: Schedule a yearly review of your expense policy to assess its effectiveness and make necessary adjustments.

Feedback loop: Encourage feedback from employees about the policy. This can provide valuable insights into what's working and might need tweaking.

Market changes: Stay informed about changes in the market and industry standards, as these might necessitate adjustments in your policy.

A dynamic business expense policy that adapts to changing business needs and external factors will serve your company much better than a rigid, outdated one.

Why do you need an employee spending policy?

A well-defined employee spending policy is not just a financial tool; it's a cornerstone of business integrity and efficiency. The primary reasons for having such a policy include:

Financial control: It helps manage and forecast company expenses more accurately.

Policy compliance: Ensures employee spending adheres to legal and tax compliance standards.

Employee clarity: Provides clear guidelines to employees, reducing confusion and potential misuse of funds.

Fraud prevention: A clear policy helps identify and prevent fraudulent expense claims.

An employee spending policy is fundamental to creating a transparent, accountable, and financially sound business environment.

Make employee reimbursements easier than ever

Establishing a comprehensive and clear expense policy is crucial in streamlining your business's financial operations. But the journey doesn’t end there — implementing the right tools to enforce and facilitate this policy is equally important. 

That’s where Expensify comes into play. Expensify simplifies the submission, approval, and reimbursement processes, making them more efficient and less error-prone. From setting your expense policy to reimbursing your employees, Expensify ensures that every step is smooth, transparent, and aligned with your business objectives. 

Ready to get started? Sign up for Expensify today .

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What Are Operating Costs?

Understanding operating costs.

• Calculation

Fixed Costs

Variable costs, semi-variable costs.

• Real-World Example
• SG&A vs. Operating Costs
• Limitations
• Operating Cost FAQs
• Corporate Finance

Operating Costs Definition: Formula, Types, and Real-World Examples

Operating costs are associated with the maintenance and administration of a business on a day-to-day basis. Operating costs include direct costs of goods sold (COGS) and other operating expenses—often called selling, general, and administrative (SG&A)—which include rent, payroll, and other overhead costs, as well as raw materials and maintenance expenses. Operating costs exclude non-operating expenses related to financing, such as interest, investments, or foreign currency translation.

The operating cost is deducted from revenue to arrive at operating income and is reflected on a company’s income statement .

Key Takeaways

• Operating costs are the ongoing expenses incurred from the normal day-to-day of running a business.
• Operating costs include both costs of goods sold (COGS) and other operating expenses—often called selling, general, and administrative (SG&A) expenses.
• Common operating costs in addition to COGS may include rent, equipment, inventory costs, marketing, payroll, insurance, and funds allocated for research and development.
• Operating costs can be found and analyzed by looking at a company's income statement.

Investopedia / Joules Garcia

Businesses have to keep track of operating costs as well as the costs associated with non-operating activities, such as interest expenses on a loan. Both costs are accounted for differently in a company's books, allowing analysts to determine how costs are associated with revenue-generating activities and whether the business can be run more efficiently.

Generally speaking, a company’s management will seek to maximize profits for the company. Because profits are determined both by the revenue that the company earns and the amount the company spends in order to operate, profit can be increased both by increasing revenue and by decreasing operating costs. Because cutting costs generally seems like an easier and more accessible way of increasing profits, managers will often be quick to choose this method.

Trimming operating costs too much can reduce a company’s productivity and, as a result, its profit as well. While reducing any particular operating cost will usually increase short-term profits, it can also hurt the company’s earnings in the long term.

For example, if a company cuts its advertising costs, its short-term profits will likely improve since it is spending less money on operating costs. However, by reducing its advertising, the company might also reduce its capacity to generate new business such that earnings in the future could suffer.

Ideally, companies look to keep operating costs as low as possible while still maintaining the ability to increase sales.

How to Calculate Operating Costs

The following formula and steps can be used to calculate the operating cost of a business. You will find the information needed from the firm's income statement that is used to report the financial performance for the accounting period.

Operating cost = Cost of goods sold + Operating expenses \text{Operating cost} = \text{Cost of goods sold} + \text{Operating expenses} Operating cost = Cost of goods sold + Operating expenses

• From a company's income statement, take the total cost of goods sold, or COGS, which can also be called cost of sales.
• Find total operating expenses, which should be further down the income statement.
• Add total operating expenses and COGS to arrive at the total operating costs for the period.

Types of Operating Costs

While operating costs generally do not include capital outlays, they can include many components of operating expenses , such as:

• Accounting and legal fees
• Bank charges
• Sales and marketing costs
• Travel expenses 
• Entertainment costs
• Non-capitalized research and development expenses
• Office supply costs
• Repair and maintenance costs
• Utility expenses
• Salary and wage expenses

Operating costs will also include the cost of goods sold, which are the expenses directly tied to the production of goods and services. Some of the costs include:

• Direct material costs
• Direct labor
• Rent of the plant or production facility
• Benefits and wages for the production workers
• Repair costs of equipment 
• Utility costs and taxes of the production facilities

A business’s operating costs are comprised of two components, fixed costs and variable costs , which differ in important ways.

A fixed cost is one that does not change with an increase or decrease in sales or productivity and must be paid regardless of the company’s activity or performance. For example, a manufacturing company must pay rent for factory space, regardless of how much it is producing or earning. While it can downsize and reduce the cost of its rent payments, it cannot eliminate these costs, and so they are considered to be fixed. Fixed costs generally include overhead costs, insurance, security, and equipment.

Fixed costs can help in achieving economies of scale , as when many of a company’s costs are fixed, the company can make more profit per unit as it produces more units. In this system, fixed costs are spread out over the number of units produced, making production more efficient as production increases by reducing the average per-unit cost of production. Economies of scale can allow large companies to sell the same goods as smaller companies for lower prices.

The economies of scale principle can be limited in that fixed costs generally need to increase with certain benchmarks in production growth. For example, a manufacturing company that increases its rate of production over a specified period will eventually reach a point where it needs to increase the size of its factory space in order to accommodate the increased production of its products.

Variable costs , like the name implies, are comprised of costs that vary with production. Unlike fixed costs, variable costs increase as production increases and decrease as production decreases. Examples of variable costs include raw material costs and the cost of electricity. In order for a fast-food restaurant chain that sells french fries to increase its fry sales, for instance, it will need to increase its purchase orders of potatoes from its supplier.

It's sometimes possible for a company to achieve a volume discount or "price break" when purchasing supplies in bulk, wherein the seller agrees to slightly reduce the per-unit cost in exchange for the buyer’s agreement to regularly buy the supplies in large amounts. As a result, the agreement might diminish the correlation somewhat between an increase or decrease in production and an increase or decrease in the company’s operating costs.

For example, the fast-food company may buy its potatoes at $0.50 per pound when it buys potatoes in amounts of less than 200 pounds. However, the potato supplier may offer the restaurant chain a price of $0.45 per pound when it buys potatoes in bulk amounts of 200 to 500 pounds. Volume discounts generally have a small impact on the correlation between production and variable costs, and the trend otherwise remains the same.

Typically, companies with a high proportion of variable costs relative to fixed costs are considered to be less volatile, as their profits are more dependent on the success of their sales. In the same way, the profitability and risk for the same companies are also easier to gauge.

In addition to fixed and variable costs, it is also possible for a company’s operating costs to be considered semi-variable (or “semi-fixed"). These costs represent a mixture of fixed and variable components and can be thought of as existing between fixed costs and variable costs. Semi-variable costs vary in part with increases or decreases in production, like variable costs, but still exist when production is zero, like fixed costs. This is what primarily differentiates semi-variable costs from fixed costs and variable costs.

An example of semi-variable costs is overtime labor. Regular wages for workers are generally considered to be fixed costs, as while a company’s management can reduce the number of workers and paid work hours, it will always need a workforce of some size to function. Overtime payments are often considered to be variable costs, as the number of overtime hours that a company pays its workers will generally rise with increased production and drop with reduced production. When wages are paid based on conditions of productivity allowing for overtime, the cost has both fixed and variable components and is considered to be a semi-variable cost.

Real-World Example of Operating Costs

Below is the income statement for Apple Inc. (AAPL) for the year ending Sept. 25, 2021, according to its annual 10-K report:

• Apple reported total revenue or net sales of $365.8 billion for the 12-month period.
• The total cost of sales (or cost of goods sold) was $213 billion, while total operating expenses were $43.9 billion.
• We calculate operating costs as $213 billion + $43.9 billion.
• Operating costs (cost of sales + operating expenses) were $256.9 billion for the period.

Apple's total operating costs must be examined over several quarters to get a sense of whether the company is managing its operating costs effectively. Also, investors can monitor operating expenses and cost of goods sold (or cost of sales) separately to determine whether costs are either increasing or decreasing over time.

SG&A vs. Operating Costs

Selling, general, and administrative expense (SG&A) is reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses (G&A) of a company. It includes all the costs not directly tied to making a product or performing a service—that is, SG&A includes the costs to sell and deliver products or services, in addition to the costs to manage the company.

SG&A includes nearly everything that isn't in the cost of goods sold (COGS). Operating costs include COGS plus all operating expenses, including SG&A. 

Limitations of Operating Costs

As with any financial metric, operating costs must be compared over multiple reporting periods to get a sense of any trend. Companies sometimes can cut costs for a particular quarter, which inflates their earnings temporarily. Investors must monitor costs to see if they're increasing or decreasing over time while also comparing those results to the performance of revenue and profit.

What Is the Total Cost Formula?

The total cost formula combines a firm's fixed and variable costs to produce a quantity of goods or services. To calculate the total cost, add the average fixed cost per unit to the average variable cost per unit. Multiply this by the total number of units to derive the total cost.

The total cost formula is important because it helps management calculate the profitability of their business. It helps managers pinpoint which fixed or variable costs could be reduced to increase profit margins . It also helps managers determine the price point for their products and compare the profitability of one product line versus another.

How Do Operating Costs Affect Profit?

Operating costs that are high or increasing can reduce a company's net profit . A company's management will look for ways to stabilize or decrease operating costs while still balancing the need to manufacture goods that meet consumer demands. If operating costs become too high, management may need to increase the price of their products in order to maintain profitability. They then risk losing customers to competitors who are able to produce similar goods at a lower price point.

What Is the Difference Between Operating Costs and Startup Costs?

Operating costs are the expenses a business incurs in its normal day-to-day operations. Startup costs, on the other hand, are expenses a startup must pay as part of the process of starting its new business. Even before a business opens its doors for the first time or begins production of a new product, it will have to spend money just to get started.

For example, the business may need to spend money on research and development, equipment purchases, a lease on office space, and employee wages. A startup often pays for these costs through business loans or money from private investors. This contrasts with operating costs, which are paid for through revenue generated from sales.

Apple. " Form 10-K, Apple Inc. ," Page 29.

• Accounting History and Terminology 1 of 35
• Absorption Costing Explained, With Pros and Cons and Example 2 of 35
• What Is an Amortization Schedule? How to Calculate with Formula 3 of 35
• Average Collection Period Formula, How It Works, Example 4 of 35
• Bill of Lading: Meaning, Types, Example, and Purpose 5 of 35
• What Is a Cash Book? How Cash Books Work, With Examples 6 of 35
• Cost of Debt: What It Means and Formulas 7 of 35
• Cost of Equity Definition, Formula, and Example 8 of 35
• Cost-Volume-Profit (CVP) Analysis: What It Is and the Formula for Calculating It 9 of 35
• Current Account: Definition and What Influences It 10 of 35
• Days Payable Outstanding (DPO) Defined and How It's Calculated 11 of 35
• Depreciation: Definition and Types, With Calculation Examples 12 of 35
• Double-Declining Balance (DDB) Depreciation Method Definition With Formula 13 of 35
• EBITDA: Definition, Calculation Formulas, History, and Criticisms 14 of 35
• Economic Order Quantity: What Does It Mean and Who Is It Important For? 15 of 35
• 4 Factors of Production Explained With Examples 16 of 35
• Fiscal Year: What It Is and Advantages Over Calendar Year 17 of 35
• How a General Ledger Works With Double-Entry Accounting Along With Examples 18 of 35
• Just-in-Time (JIT): Definition, Example, and Pros & Cons 19 of 35
• Net Operating Loss (NOL): Definition and Carryforward Rules 20 of 35
• NRV: What Net Realizable Value Is and a Formula To Calculate It 21 of 35
• No-Shop Clause: Meaning, Examples and Exceptions 22 of 35
• Operating Costs Definition: Formula, Types, and Real-World Examples 23 of 35
• Operating Profit: How to Calculate, What It Tells You, and Example 24 of 35
• Production Costs: What They Are and How to Calculate Them 25 of 35
• What Is a Pro Forma Invoice? Required Information and Example 26 of 35
• Retained Earnings in Accounting and What They Can Tell You 27 of 35
• Revenue Recognition: What It Means in Accounting and the 5 Steps 28 of 35
• What Is a Sunk Cost—and the Sunk Cost Fallacy? 29 of 35
• Triple Bottom Line 30 of 35
• Variable Cost: What It Is and How to Calculate It 31 of 35
• Work-in-Progress (WIP) Definition With Examples 32 of 35
• Write-Offs: Understanding Different Types To Save on Taxes 33 of 35
• Year-Over-Year (YOY): What It Means, How It's Used in Finance 34 of 35
• Zero-Based Budgeting: What It Is and How to Use It 35 of 35

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4 things you may not know about 529 plans

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How to spend from a 529 college plan

Key takeaways

• Withdrawals from 529 plans are not taxed at the federal level—as long as you understand and follow all the rules for qualifying expenses. You'll have to report your 529 plan spending to the IRS, so keeping careful records is important.
• Decide ahead of time how you'll withdraw the funds and use them.
• You'll also want to plan ahead for any tax credits you may qualify for, which could help you decide how much you need to take from your 529 account.
• 529 savings plans aren't just for college. You can spend up to $10,000 from a 529 plan on tuition expenses for elementary, middle, or high school. 1

Year after year, you and your child have been saving for college through a 529 savings account. Now college is closer and it's time to think about spending the money you've put aside. You’ll be in control of how much is withdrawn and how it'll be used, but there are a few things you need to know up front to make the most of your savings.

First a reminder about federal gift tax limits: In 2024, you can save up to $18,000 per parent in a 529 account, or $36,000 per couple. Grandparents can also contribute up to $36,000 per beneficiary per year. Contributing more than $18,000 per beneficiary would need to be reported to the IRS as a gift. However, with "accelerated gifting," 2 a 529 account can be funded with contributions of $90,000 per person or $180,000 per couple—which uses up your federal gift-tax exclusion for 5 years.

What can you use this money for? Which expenses trigger taxes and penalties? If you do things right, no penalties or federal income tax—and, in many states, no state income tax—will be due on your withdrawals. But learning by trial and error can be costly at tax time, and more importantly, your child could lose out on financial aid if you're not careful. So learn the ins and outs ahead of time.

Here's a 9-step guide to help you make your 529 savings go as far as possible.

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1. Plan for federal-income-tax-free withdrawals

Qualified withdrawals are federal income tax-free so long as the total withdrawals for the year don't exceed your child's adjusted qualified higher education expenses (QHEEs), discussed in #3 below.

To calculate these, add up tuition and fees, room and board, books and supplies, any school-related special services, and computer costs, and then deduct any costs already covered by tax-free educational assistance. Examples include Pell grants, tax-free scholarships and fellowships, tuition discounts, the Veteran's Educational Assistance Program , and tax-free employer educational assistance programs.

But you're not done yet. You'll also need to deduct costs used to claim an American Opportunity Tax Credit or Lifetime Learning Credit . The basic rule: You can't double up tax benefits for the same college expenses, discussed in #5.

2. Know which expenses qualify

When you pay qualified education expenses from a 529 account, your withdrawals are federal-income-tax- and penalty-free. As of 2019, qualified expenses include tuition expenses for elementary, middle, and high schools (private, public, or religious). Although the money may come from multiple 529 accounts, only $10,000 total can be spent each year per beneficiary on elementary, middle, or high school tuition.

Money saved in a 529 plan can also be used to pay qualified expenses associated with college or other postsecondary training institutions. Eligible schools include any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education.

While funds from a 529 account can be used to pay for expenses required for college, not all expenses qualify. Tuition and fees are considered required expenses and are allowed, but when it comes to room and board, the costs can't exceed the greater of the following 2 amounts:

• The allowance for room and board included in the school’s cost of attendance for federal financial aid calculations
• The actual amount charged if the student is living in housing operated by the educational institution

In other words, if your child is planning to live off campus in housing not owned or operated by the college, you can't claim expenses in excess of the school's estimates for room and board for attendance there. So it's important to confirm room and board costs with the school's financial aid office in advance so you know what to expect. Also, keep in mind that in order for room and board to qualify, your child must be enrolled half time or more.

Textbooks count as an education expense, but only those included on the required reading for the course.

Computers and related equipment and services are considered qualified expenses if they are used primarily by the beneficiary during any of the years that the beneficiary is enrolled at an eligible educational institution. Computer software for sports, games, or hobbies would be excluded unless the software is predominantly educational in nature.

It's important to make sure that items purchased are qualified expenses and to keep receipts of purchase. Be careful to avoid expenses that don't qualify—for example, equipment used primarily for amusement or entertainment doesn’t qualify. These and other lifestyle expenses, like insurance, sports expenses, health club dues, and travel and transportation costs, will have to be funded through other resources. If you're not sure whether a plan covers a particular college expense, the college's financial aid office should be able to help.

Check with the school to find out exactly what's required so you can avoid accidentally taking a nonqualified distribution. If you withdraw money for anything that doesn’t meet the qualified expense criteria, any part of the distribution that is made up of earnings on contributions will be taxed as ordinary income and could incur a 10% federal penalty. However, the penalty may be waived if there are extenuating circumstances, such as the disability or death of the beneficiary, or if the beneficiary receives a scholarship, or attends a US military academy.

If a distribution from a 529 plan is later refunded by an eligible educational institution, a recontribution can be made to the 529 plan. The recontribution must be made no more than 60 days after the date of the refund. The recontributed amount cannot exceed the amount of the refund.

3. Keep good records

Your 529 savings plan administrator will, in most cases, provide an annual statement that reports your contributions and earnings, including the amount you withdrew from the plan. But it's you, not your program provider, who is responsible for accurately reporting to the IRS. If your withdrawals are equal to or less than your qualified higher education expenses (QHEEs), then your withdrawals including all your earnings are tax-free. If your withdrawals are higher than your QHEE, then taxes, and potentially a penalty, will be due on earnings that exceed your qualified expenses. For many people, keeping track is easy because large tuition bills use up most of their 529 savings. But if you are using your 529 plan for room and board expenses, it's smart to keep those receipts.

4. Decide how to withdraw the funds

It's important that withdrawals you take from your 529 savings account match the payment of qualifying expenses in the same tax year. Like some families, you may choose to pay the school directly from your 529 account for ease in recordkeeping and matching distributions to school expenses. In this situation, make sure you are aware of school payment deadlines and the time required to transfer funds from the 529 account to the school. It can take several days for investments to be sold out of your 529 account and mailed to the school and then a week or so for the payment to make it through the mail and then processed by the school.

Or you may choose to move money from your 529 account to your bank or brokerage account. Many colleges prefer payments to be made electronically through their website from a bank or brokerage account. You can choose to pay bills first and then reimburse yourself from the 529 account, or you can pull money from the 529 account and then use it to pay bills from your bank or brokerage account. This path also provides flexibility when paying smaller bills like those for books or off-campus room and board.

Keep in mind that you must submit your request for the cash within the same calendar year—not the same academic year—as you make the payment. If the timing is off, you risk owing tax because it's considered a nonqualified withdrawal.

If you're enrolled in a plan through a financial professional, contact them when you're ready to withdraw funds. If you have a direct 529 plan, contact the plan administrator for withdrawals. Remember to build in time for processing.

Another withdrawal option: You could have the money distributed from the 529 account to your child. If some of the money is used for nonqualified expenses, such as buying a car, there may be reportable earnings—which will go on your child's tax return. Any earnings are taxed at your child's lower tax bracket—unless the so-called "kiddie tax" applies. The kiddie tax requires certain children as old as 23 to pay tax on unearned income at their parents' marginal tax rate. Check with your tax professional to see if this applies.

Another reason to have the distribution sent to your child is that it may be possible to wipe out any resulting tax with an American Opportunity Tax Credit or Lifetime Learning Credit, as explained below. Because of income limitations, you may not be eligible to claim these credits on your own return. Remember though, if the payments are used for a qualified higher education expense, no federal taxes are owed.

Ask your plan provider for instructions if you are interested in distributing money directly to the beneficiary.

5. Plan ahead—529 account funds may conflict with other tax incentives

The federal government offers additional tax incentives to help ease the burden of some college expenses, but unfortunately, you won't be able to use a 529 account to cover those same expenses. If you do, the IRS will consider it double dipping, so you'll want to factor in whether you'll be claiming this tax credit when deciding how much to withdraw from your 529 account. These tax credits may also affect your child’s eligibility for financial aid.

Below are the 2 most common tax credits. Remember, a credit goes directly against your tax liability, which is different from a deduction. Only one credit can be claimed for a student each year.

• American Opportunity Tax Credit allows families of undergraduates to deduct the first $2,000 spent on qualified education expenses and 25% of the next $2,000. To qualify for the full credit in 2024, single parents must have a modified adjusted gross income of less than $90,000, or less than $180,000 if married and filing jointly. The total credit cannot exceed $2,500 per tax year and the credit can be claimed for only 4 years.
• Lifetime Learning Credit provides up to a $2,000 tax credit on the first $10,000 of college expenses so long as your modified adjusted gross income is less than $90,000 in 2024 for a single filer, or less than $180,000 if married and filing jointly. There is no limit to the number of years this credit can be claimed.

6. Prioritize which 529 accounts to spend from first

If your child has more than one 529 savings account, such as an additional account through a grandparent, knowing which account to use first or how to take advantage of them concurrently could help. Don't leave decisions to the last minute—instead, sit down with all plan owners and decide on a withdrawal strategy ahead of time to make sure the qualifying college costs are divvied up in the most beneficial way.

Also, if financial aid is in the picture, a distribution from a grandparent-owned 529 account may be considered income to the child on a future financial aid application, which could significantly affect aid. To avoid any problems, grandparents can take distributions from 529s as early as the spring of the student's sophomore year—right after the last tax year on the student's last undergraduate Free Application for Federal Student Aid (FAFSA), assuming the student finishes college within 4 years. Wait until the following spring to employ this strategy if it looks like your child will take 5 years to graduate.

7. Money left over in your 529 plan? Make a smart move

With careful planning, you can avoid having money left over in your 529 account once your child graduates. But if funds remain, there are several options available. You can let the money sit in the account in anticipation of your child continuing on to graduate school or another post-secondary institution. If so, you'll want to rethink your investment strategy depending on how soon the funds will be needed so you can take full advantage of the potential for growth over time.

You also have the ability to change beneficiaries without incurring tax consequences. Here are 2 different options for maintaining your tax advantage and avoiding any penalty:

• Change the designated beneficiary to another member of the original beneficiary's family. ( IRS Publication 970 has a lengthy list detailing which relatives count as family in this case.) This can be done for any reason, but is an option particularly if your child receives a scholarship or decides not to attend college.
• Roll over funds from the 529 account to the 529 plan of one of your other children without penalty. This is a good option if there are funds left over after graduation.

Regardless of which option you choose, you may want to rethink your investment strategy, depending on how soon the funds will be needed.

Also, each state has different restrictions on 529 accounts, so check with your financial professional or ask your plan provider for the specific requirements of your plan.

Note, too, that The SECURE 2.0 Act allows, with restrictions, leftover 529 funds to be rolled over into a Roth IRA 3 . Please consult a financial or tax professional regarding your specific circumstances before making any investment decision.

What if the beneficiary gets a scholarship? You'll be happy to learn that there is a scholarship exception to the 10% penalty. You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won't pay the additional 10% penalty that's imposed on a nonqualified withdrawal. Remember to ask for a scholarship receipt for your tax records.

8. Consider how college savings affect student aid and loans

If you'll count on financial aid to supplement your college savings, you'll want to do what you can to improve your eligibility. While individual colleges may treat assets held in a 529 plan differently, in general these assets have a relatively small effect on federal financial aid eligibility. Because 529 plan assets are considered assets of the parent, they tend to have a small effect when the government calculates your financial aid eligibility, whereas accounts that are considered assets of the child, such as an UGMA or UTMA account, tend to have a greater effect on federal financial aid eligibility. (This does not affect 529 accounts that are owned by a grandparent.) For more information, read about financial aid planning on Fidelity.com.

If you're thinking of taking out loans that start incurring interest immediately, you may want to spend 529 funds first, deferring these loans until later. Another situation that would call for using 529 plan funds first would be if there's a chance your child may graduate earlier or receive some other funding down the road, such as a scholarship.

9. Safeguard your plan assets

At some point, you'll actually need to start spending the money you've set aside. You will need to think about preserving gains you may have made so that funds will be there when they're needed. If your plan relies on an age-based investment strategy, this process is already in place and your asset mix has slowly evolved toward more conservative investments like money market funds and short-term bonds.

Now's the time to sit down with all the contributing family members and your child and create a withdrawal plan that's ready to set in motion. It's a smart idea to spend from the plan in established increments, and withdraw wisely from your college savings plans, so you can reap the tax advantages and avoid mistakes along the way.

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(debug tcm:2 ... decode crypto clarity on crypto every month. build your knowledge with education for all levels. fidelity smart money ℠ what the news means for your money, plus tips to help you spend, save, and invest. active investor our most advanced investment insights, strategies, and tools. insights from fidelity wealth management ℠ timely news, events, and wealth strategies from top fidelity thought leaders. women talk money real talk and helpful tips about money, investing, and careers. educational webinars and events free financial education from fidelity and other leading industry professionals. done add subscriptions no, thanks. planning for college saving and budgeting managing taxes fidelity does not provide legal or tax advice. the information herein is general and educational in nature and should not be considered legal or tax advice. tax laws and regulations are complex and are subject to change, which can materially affect investment results. fidelity cannot guarantee that the information herein is accurate, complete, or timely. fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. consult an attorney or tax professional regarding your specific situation. 1. ​529 participants may take up to $10,000 in distributions tax free per beneficiary for tuition expenses incurred with the enrollment or attendance of the designated beneficiary at a public, private, religious elementary or secondary school, certain apprenticeship costs, or student loan repayments per taxable year. the money may come from multiple 529 accounts; however, the $10,000 amount will be aggregated on a per beneficiary basis. any distributions in excess of $10,000 per beneficiary may be subject to income taxes and a federal penalty tax. 2. accelerated gifting, or an accelerated transfer, to a 529 plan (for a given beneficiary) of $85,000 (or $170,000 combined for spouses who gift split) will not result in federal transfer tax or use of any portion of the applicable federal transfer tax exemption and/or credit amounts if no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary are made over the 5-year period and if the transfer is reported as a series of 5 equal annual transfers on form 709, united states gift (and generation-skipping transfer) tax return. if the donor dies within the 5-year period, a portion of the transferred amount will be included in the donor's estate for estate tax purposes. 3. beginning january 2024, the secure 2.0 act of 2022 (the "act") provides that you may transfer assets from your 529 account to a roth ira established for the designated beneficiary of a 529 account under the following conditions: (i) the 529 account must be maintained for the designated beneficiary for at least 15 years, (ii) the transfer amount must come from contributions made to the 529 account at least five years prior to the 529-to-roth ira transfer date, (iii) the roth ira must be established in the name of the designated beneficiary of the 529 account, (iv) the amount transferred to a roth ira is limited to the annual roth ira contribution limit, and (v) the aggregate amount transferred from a 529 account to a roth ira may not exceed $35,000 per individual. it is your responsibility to maintain adequate records and documentation on your accounts to ensure you comply with the 529-to-roth ira transfer requirements set forth in the internal revenue code. the internal revenue service (“irs”) has not issued guidance on the 529-to-roth ira transfer provision in the act but is anticipated to do so in the future. based on forthcoming guidance, it may be necessary to change or modify some 529-to-roth ira transfer requirements. please consult a financial or tax professional regarding your specific circumstances before making any investment decision. fidelity brokerage services llc, member nyse, sipc , 900 salem street, smithfield, ri 02917 698434.11.0 mutual funds etfs fixed income bonds cds options active trader pro investor centers stocks online trading annuities life insurance & long term care small business retirement plans 529 plans iras retirement products retirement planning charitable giving fidsafe , (opens in a new window) finra's brokercheck , (opens in a new window) health savings account stay connected.

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Nissan to make EVs more affordable, plans to slash costs to reach EV/ICE price parity

Nissan launched a new business plan on Monday as the Japanese automaker looks to drive down EV costs. The new plan calls for significant EV cost reductions to reach EV and ICE cost parity by the end of the decade.

Despite kicking off a new era with the launch of its LEAF in 2010, Nissan has quickly fallen behind with longer-range, more advanced EVs rolling out.

“We cannot continue old ways of business from the past into the future,” Nissan’s CEO Makota Uchida explained in January.

The 90-year-old automaker announced its new “The Arc” business plan Monday as it looks to compete with Tesla and low-cost automakers from China. Nissan aims for “significant next-generation EV cost reduction” with new partnerships and technology.

Nissan’s new strategy will run between its NEXT and Ambition 2030 plans. “Faced with extreme market volatility,” Uchida said, “Nissan is taking decisive actions guided by the new plan to ensure sustainable growth and profitability.”

The two-part plan includes accelerating its transition to EVs while maintaining a “balanced electrified/ICE portfolio.” Through the initiative, Nissan aims to reach 1 million in annual sales with an operating profit margin of over 6% by the end of fiscal 2026.

Nissan reveals its new business plan to cut EV costs

Nissan says this will pave the way for the second part, which includes enabling the EV transition with partnerships, differentiated innovations, and new revenue streams for long-term growth.

From the new business opportunities, Nissan sees revenue potentially reaching 2.5 trillion yen ($16.5 billion).

Nissan will launch 30 new models over the next three years, including 16 electrified and 14 ICE models. From 2024 to 2030, Nissan will launch 34 electrified models to cover all segments. The automaker expects electrified vehicles to account for 40% of global sales by 2026 and 60% by 2030.

• In the US, Nissan is investing $200 million in integrated customer service with plans to refresh 78% of its line-up. This includes launching e-POWER and plug-in hybrid models.
• Nissan is looking to pick up the slack in China with eight new energy vehicles (NEVs), including four Nissan-branded NEVs. The automaker plans to export models by 2025. By 2026, Nissan targets 1 million units in annual sales, an increase of 200,000.
• In Europe, Nissan is launching six all-new models, aiming for a 40% EV sales mix by 2026.

Nissan’s “product offensive” will include new development and manufacturing upgrades to make EVs more affordable.

The automaker says by developing “EVs in families, integrating powertrains, utilizing next-gen manufacturing, group sourcing, and battery innovations,” Nissan aims to reduce the cost of next-gen EVs by 30% (compared to the current Nissan Ariya). This will help drive down costs to achieve cost parity between EV and ICE cars by fiscal 2030.

Nissan plans to introduce new EV tech, including NCM li-ion, LFP, and all-solid-state batteries for a wide range of uses. Its new NCM batteries are expected to reduce fast charging times by 50% while increasing energy density by 50%.

After confirming an EV partnership with Honda earlier this month, Nissan followed up with another collaboration with Mitsubishi as the automaker seeks to boost its competitiveness.

Nissan confirmed it will launch a new LEAF successor and electric Juke and Qashqai (Rogue Sport in the US) models in Europe. According to reports, the new LEAF will look nothing like the model it’s replacing with a more SUV/crossover design, similar to the Ariya. It will also roll out in the US and other global markets.

FTC: We use income earning auto affiliate links. More.

Peter Johnson is covering the auto industry’s step-by-step transformation to electric vehicles. He is an experienced investor, financial writer, and EV enthusiast. His enthusiasm for electric vehicles, primarily Tesla, is a significant reason he pursued a career in investments. If he isn’t telling you about his latest 10K findings, you can find him enjoying the outdoors or exercising

7 Tax Mistakes That Can Cost Small Business Owners Thousands

T ax season is a good time for small business owners to reflect upon their past year's business performance, and plan ahead for next year. As part of your tax planning, it's important to watch out for a few big tax mistakes. Small business owners work too hard to lose money to unnecessary taxes or bookkeeping mistakes. These tax mistakes could be separating you from too many of your hard-earned dollars -- and undermining your long-term financial wellness -- in your business and personal finances.

Let's look at a few big tax mistakes that any freelancer, solopreneur, or small business owner should aim to avoid.

Read more: we researched free tax software and put together a list of the best options here

1. Not separating your business and personal finances

Even if you're in the early days of starting a business, even if it's just a side hustle, try to separate your business income and expenses from your personal finances. Don't pay vendors from a personal checking account. Don't use business bank accounts for personal expenses.

If you do not have a clear, separate financial identity for your business and personal finances, you're making life harder for yourself. If your business and personal funds are intermingled, this makes it harder to keep track of your legitimate tax-deductible business expenses. You might forget to deduct hundreds of dollars that could've saved you money on taxes. Or worse -- you could try to deduct something that shouldn't be deducted, and end up making yourself vulnerable to an IRS audit.

2. Not tracking your business expenses

Too many small business owners get so excited about running the business that they get sloppy about bookkeeping. And there's no excuse for this anymore! There's so much great small business accounting software available now. It's easier than ever before to keep track of your deductible business expenses all year round, month after month.

And good business bookkeeping is not just about taxes or tracking expenses: it's a way to keep an eye on your business's performance. Where's your revenue coming from? Did you have a good week, month, or quarter? Who are your biggest clients, where are your biggest risks, strengths, weaknesses, and opportunities? Good bookkeeping helps you monitor the pulse of your business -- not just at tax time.

3. Not forming an LLC (or other business entity)

If you're serious about being a small business owner, and not just a hobbyist or side hustler, you should form a Limited Liability Company (LLC) or other legal business entity for your business. Make your business "official" and real in the eyes of the law by forming an LLC.

Setting up an LLC also helps you get an employer ID number (EIN) tax ID for tax purposes. It lets you open a business bank account and start to build business credit under the name of your company. Forming an LLC can also give you some other useful tax benefits -- because it gives you flexibility for how to handle your business income for tax purposes.

4. Not filing taxes as an S Corporation

If you have an LLC, and you have enough business income to be worth using this strategy, you should consider filing taxes as an S Corporation. This is a tax strategy that small business owners can use to get more advantageous tax treatment for their business income.

Instead of paying self-employment taxes on your full amount of business income like a sole proprietor or LLC would do, forming an LLC and then electing to file taxes as an S Corporation lets you pay yourself a salary, and then pay yourself a "distribution" of other business income -- but you don't have to pay self-employment taxes on that distribution amount. Like an LLC, an S Corp is a pass-through entity -- so the income also gets the federal 20% qualifying business income deduction .

Talk to an accountant for advice. Filing taxes as an S Corp might not be the right choice for every business owner or type of business.

5. Not hiring professional tax help

Speaking of accountants: you do have professional tax help, right? You're not trying to run a business and file your own taxes , are you?

Small business taxes are generally way too complicated to navigate yourself. Spend the money and get some help. It's a huge weight off your shoulders. Even if you love bookkeeping and taxes, it's beneficial to get professional tax help so you have an extra set of eyes on your tax return -- and someone you can go to for personalized advice.

6. Not getting a health savings account

If you have a high-deductible health plan (HDHP) that is eligible for a health savings account (HSA), you really should use it. Health savings accounts are versatile, powerful tax-advantaged accounts. It's like a traditional IRA, but for healthcare. For 2024, you can deduct up to $4,150 of HSA contributions (if you have single coverage) or $8,300 for family coverage. Don't make the mistake of missing out on this extra tax break -- and there are no income limits.

7. Not using a small business retirement plan

Small business owners also get an extra tax break from the IRS when saving for retirement. There are several types of tax-advantaged small business retirement plans that your company can use, depending on whether you have employees and other aspects of your business finances. Some of these plans, like a SEP IRA, can let you save more money for retirement than you could save as an employee with a 401(k).

Bottom line

Small business owners work too hard to lose money to tax mistakes. Use tax software , bookkeeping software, professional tax help, tax-advantaged accounts, and other tools to help you maximize your tax savings and build a stronger foundation for your business.

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How Does Paris Stay Paris? By Pouring Billions Into Public Housing

One quarter of residents in the French capital live in government-owned housing, part of an aggressive plan to keep lower-income Parisians — and their businesses — in the city.

By Thomas Fuller

Thomas Fuller, a former European Union and Paris correspondent, returned to the French capital to interview public housing tenants and officials from Paris City Hall.

The two-bedroom penthouse comes with sweeping views of the Eiffel Tower and just about every other monument across the Paris skyline. The rent, at 600 euros a month, is a steal.

Marine Vallery-Radot, 51, the apartment’s tenant, said she cried when she got the call last summer that hers was among 253 lower-income families chosen for a spot in the l’Îlot Saint-Germain, a new public-housing complex a short walk from the Musée d’Orsay, the National Assembly and Napoleon’s tomb.

“We were very lucky to get this place,” said Ms. Vallery-Radot, a single mother who lives here with her 12-year-old son, as she gazed out of bedroom windows overlooking the Latin Quarter. “This is what I see when I wake up.”

Public housing can conjure images of bleak, boxy towers on the outskirts of a city, but this logement social was built in the former offices of the French Defense Ministry, in the Seventh arrondissement, one of Paris’s most chic neighborhoods. It’s part of an ambitious and aggressive effort to keep middle- and lower-income residents and small-business owners in the heart of a city that would otherwise be unaffordable to them — and by extension, to preserve the ineffable character of a city adored by people around the globe.

This summer, when the French capital welcomes upward of 15 million visitors for the Olympic Games , it will showcase a city engineered by government policies to achieve mixité sociale — residents from a broad cross-section of society. One quarter of all Paris residents now live in public housing, up from 13 percent in the late 1990s. The mixité sociale policy, promoted most forcefully by left-wing political parties, notably the French Communist Party, targets the economic segregation seen in many world cities.

“Our guiding philosophy is that those who produce the riches of the city must have the right to live in it,” said Ian Brossat, a communist senator who served for a decade as City Hall’s head of housing. Teachers, sanitation workers, nurses, college students, bakers and butchers are among those who benefit from the program.

Making the philosophy a reality is increasingly hard — the wait list for public housing in Paris is more than six years long. “I won’t say this is easy and that we have solved the problem,” Mr. Brossat said.

Paris is being buffeted by the same market forces vexing other so-called superstar cities like London, San Francisco and New York — a sanctum for the world’s wealthiest to park their money and buy a piece of a living museum. The average price for a 1,000-square-foot apartment in the center of the capital today is 1.3 million euros (about $1.41 million), according to the Chamber of Notaries of Paris .

The Fondation Abbé Pierre, an influential charity, was unusually emphatic in its annual report, published in February, calling France’s affordability crisis a “social bomb,” with rising homelessness and 2.4 million families waiting on public-housing applications, up from 2 million in 2017. Still, the measures that Paris has taken to keep lower-income residents in the city go far beyond the initiatives in most other European cities , not to mention American ones.

Every Thursday, Jacques Baudrier, the Paris city councilor in charge of housing, scrolls through the list of properties being exchanged by sellers and buyers on the private market. With some exceptions, the city has the legal right to pre-empt the sale of a building, buy the property and convert it to public housing.

“We are in a constant battle,” said Mr. Baudrier, who wields a 625 million euro annual budget.

The fight, he said, is against forces that make buying Parisian real estate impossible for all but the well-to-do, including buyers who snap up apartments as pieds-à-terre and then leave them empty for most of the year. Paris has also sharply restricted short-term rentals, after officials became alarmed when historic neighborhoods, including the old Jewish quarter, the Marais, appeared to be shedding full-time residents as investors bought places to rent out to tourists.

At the same time, the city has built or renovated more than 82,000 apartments over the past three decades for families with children. Rents range from six to 13 euros per square meter, depending on household income, meaning that a two-bedroom, 1,000-square-foot apartment might go for as little as 600 euros ($650) a month. It has also built 14,000 student apartments over the past 25 years; monthly rents at one complex currently nearing completion in the 13th arrondissement start at 250 euros a month.

For City Hall, social engineering also means protecting the petits commerces, the small shops that contribute to the city’s sense of timelessness. When visitors here meander through what seems like a series of small villages, with boulangeries, cheese shops, cobblers and mom-and-pop hardware stores, it is not entirely organic.

City Hall has a direct hand in the types of businesses that take root and survive in Paris because it is the landlord, through its real estate subsidiaries, of 19 percent of the city’s shops. Nicolas Bonnet-Oulaldj, the city counselor who oversees the city’s commercial landholdings, said his office is constantly studying neighborhoods to maintain a balance of essential shops and limit the number of chains, which can usually pay higher rent.

“We don’t rent to McDonald’s, we don’t rent to Burger King and we don’t rent to Sephora,” said Mr. Bonnet-Oulaldj. He acknowledged that in some neighborhoods where private landlords have rented to chains the battle has been plainly lost.

The city is deliberate in what shops it chooses. In an area that had become thick with hairdressing salons, City Hall rented to a boulangerie and a cheese shop. In other neighborhoods it has chosen to rent to bicycle repair shops, in part to reinforce the city’s push to reduce the number of cars in favor of bikes. It doesn’t rent to massage parlors on the grounds that they are sometimes fronts for prostitution.

A few minutes from the Place de la Bastille is one of the beneficiaries of the city’s retail policies. Emmanuelle Fayat, a luthier who restores and services violins for orchestra musicians, sits surrounded by maple and spruce and the tools of her trade: neatly organized rasps, planes and chisels. She rents her shop for “a modest amount” from a city-owned real estate management company.

“I have no knowledge of marketing and I’ve never asked myself how to become rich,” Ms. Fayat said on a recent afternoon. “I just want to do my job. I like my profession more than money.”

About a mile away, in a neighborhood rich with cafes and restaurants, Librairie Violette and Co, a feminist and lesbian bookshop, is another beneficiary of Paris’s retail diversity program. When the bookshop’s previous location was bought by an insurance company and the original owners retired, a group of women that wanted to keep the business going struggled to find a new home and announced they were closing the store.

City officials reached out and offered a new space at below-market rates. “Banks refused to lend us money,” said Loïse Tachon, a co-manager of the shop. “They didn’t think it would be lucrative enough.”

Further north, near the Buttes-Chaumont park, the city rents a storefront to Desirée Fleurs, which specializes in flowers grown in the Paris region. Audrey Venant, the co-founder of the shop, sees the program as a necessary and protective guiding hand.

“Local businesses are very, very fragile,” she said, surrounded by narcissus, ranunculus, snapdragon, all perfumed by eucalyptus. “I see a lot of bankruptcies.”

Ms. Venant and her husband, a painter and sculptor, live in a 750-square-foot loft that is also part of the city’s public-housing program. Her monthly 1,300-euro rent is well below market rates, she said.

The French statistics agency, Insee, reports that Paris is home to more than 10,000 nurses, 1,700 bakers, 470 butchers, 945 garbage collectors and 5,300 janitors. The push for more social housing and other programs to make the city more affordable has coincided with the dominance of left-wing political parties, who came to power in 2001 after decades of right-wing rule.

But François Rochon, an urban planning consultant, said there is a functional consensus between right and left in France today on the need for public housing that mirrors some other European nations, but not the United States. “Living in social housing is not stigmatized,” said Mr. Rochon, who pointed to its roots a century ago in France, when companies built apartments for their workers.

As a measure of the left-right alignment on the issue, Benoist Apparu, a former housing minister who served in a conservative government, described social housing as “absolutely essential.”

“A city, if it’s only made up of poor people, is a disaster,” said Mr. Apparu, who now works for a property developer. “And if it’s only made up of rich people, it’s not much better.”

Paris’s housing program is part of the trade-off of the welfare state: affordable health care and education in exchange for some of the highest income-tax rates and social charges in Europe. Public housing, however, is increasingly available only for those lucky enough to get it.

There also is vestigial cynicism in Paris about public housing after a series of scandals in the 1990s, when some conservative politicians were revealed to be paying cheap rents for luxury city-owned apartments. Today, the city awards public housing through a system that strips the names of applicants and prioritizes them through a points system that factors income and family circumstances.

Mostly, resistance comes at the local level, Mr. Rochon said. Residents in central arrondissements, for example, have often pushed back against building public housing, and the neighborhoods remain bastions of the wealthy. There is also disagreement about how far the government can or should push public housing in the future. The current goal is for Paris to have 30 percent public housing for low-income residents and 10 percent for middle-income residents by 2035.

Mr. Baudrier, the Paris City Council member, said he believes that in the long term, 60 percent of housing in the city should be public and reserved for low- and middle-income families.

But building new public housing has been particularly challenging because so much of the city is already so densely packed — and often protected by landmark status.

City planners have negotiated with the public railways to buy old train yards and rights of way. They’ve also seized on opportunities like the one that arose in 2018, when the French Defense Ministry consolidated its offices in Paris and the city negotiated to buy the l’Îlot Saint-Germain for well below market rates. The ensuing construction of 253 apartments was financed by the sale of part of the building to a Qatari investment fund, which is building a luxury hotel, as well as low-interest government loans that have durations as long as 50 to 80 years, according to Emmanuelle Cosse, a former housing minister.

City Hall has also taken over condemned buildings. Fabrice Chaillou, a father of two who manages computer networks, lives in public housing on the northern edge of Paris that was built from the ruins of a dilapidated neighborhood. He pays 980 euros a month for a three-bedroom apartment that he waited 10 years to get. Among his neighbors are a janitor, teachers, a car salesman and a police officer.

The program has allowed Mr. Chaillou and his wife to raise their two children in the city. But he knows that the future of social housing will always face at least one big challenge: “The problem is that once you get in, you never want to leave.”

Thomas Fuller , a Page One Correspondent for The Times, writes and rewrites stories for the front page. More about Thomas Fuller