SaaS Business Expenses: What are they?
SaaS businesses are booming, with new startups being launched every year. These businesses are not like the traditional brick and mortar businesses (e.g., grocery stores, ice cream parlors, car dealerships). Thus, it is necessary to consider how they are different and whether the difference expenses associated with SaaS companies can be deducted from the company’s revenue earned during the fiscal year.
What is SaaS?
SaaS is the abbreviated term used for software as a service companies. These companies provide services to their clients by creating software or programs that perform specialized services for their clients. Those services may include accounting, bookkeeping, inventory, tax preparation, and record keeping software. The software can usually be purchased via CD, downloaded, or accessed online.
SaaS companies may do more than provide software-based services. They may also do consulting, training, program implementation, program repair and maintenance, and other software-related services. These services must also be accounted for in the SaaS’ income statements and tax filings.
Why are SaaS business expenses different from a traditional business?
SaaS companies may not have a corporate headquarters, local employees, or a lot of physical assets. They may be purely online, with remote employees, and use third-party servers and software to run their operations. In addition, SaaS companies are likely to have more expenses related to programming and online activities than a traditional brick and mortar business. It is the classification of the programming and online expenses that may perplex business owners or their accountants.
What are SaaS business expenses?
SaaS businesses have costs that are associated with developing, operating, delivering, and maintaining the delivery of software to its customers. Those expenses can be deducted from the revenue earned by the company during the fiscal year in which the services were delivered. Moreover, some expenses may be expensed during the year in which they are incurred or deducted over more than one year because the useful life of the item exceeds one year.
SaaS business expenses may include the items in the chart below.
|Facilities Payments||Rent, mortgage payments|
|Property Taxes||Taxes on land, buildings, structures|
|Home Business Office Costs||Rent, lease payment, mortgage interest, utilities, repairs, renovations, painting|
|Utilities||Electricity, gas, water, phone|
|Furniture, Equipment, Machinery||Computer equipment, chairs, desks, bookcases, point of sale systems, depreciation costs, photocopiers, scanners, laminating machines|
|Office Supplies||Writing utensils, staples, paperclips, file folders, post-its|
|Advertising and Marketing||Pay per click, Google Ads, billboard placements, prize giveaways, business cards, graphic designer (e.g., website images, logos, packaging)|
|Website and Software Expenses||Domain name, platform hosting fee, website maintenance, plugins, software, apps|
|Entertainment and Meals||Tickets for sporting events, galas, networking events; business meetings|
|Business Meals and Travel Expenses||Meals and travel expenses when traveling for business (e.g., airfare, hotels, vehicle, rental, meals)|
|Vehicle Expenses||Vehicle purchase price, mileage, oil changes, insurance, repairs and maintenance, depreciation|
|Employee Compensation||Wages, salaries, sales commissions, bonuses|
|Employee Benefits||Health insurance, dental insurance, paid holidays, paid vacations, free meals at work, subsidized child daycare, 401(k) plans, employer supplied transportation|
|Insurance||Business insurance, business interruption, product liability, workers’ compensation, disability insurance|
|Licenses and Permits||Occupational licenses, health permits, relevant licenses, relevant certifications|
|Taxes||Income taxes, payroll taxes, social security and medicare contributions, business taxes|
|Interest Payments and Bank Fees||Fees for banking, payment processing, online payment services, minimum balance maintenance, overdrafts, account maintenance|
|Membership Fees||Chamber of commerce, trade organizations|
|Professional Services||Marketing, accounting, legal, tax consulting, designer fees (website, logos, product packaging, product design)|
|Training and Education||Employee training, conference fees, workshops, software training, education, skills updates|
|Mobile Phone Services||Phone costs, contracts, accessories (e.g., speakers, headphones, phone cases)|
|Research and Development||Costs of improving the software, developing new software, figuring out solutions to software problems|
|Sales Costs||Travel, payroll, software, merchandising,|
|Marketing||Print advertising, digital advertising, exhibitions, promotional activities, conferences, payroll, business cards, posters, subscriptions (e.g., Mailchimp, HubSpot, Intercom, Bugsnag)|
|Merchandising||Cups, caps, t-shirts, bumper stickers, pens, pencils, giveaways|
|General Administration Fees||Rent, accounting, insurance, meals, office expenses, (e.g., equipment, supplies, postage), payroll, professional services, communications software (e.g, Trello, Slack), travel, utilities|
Different Types of Business Expenses
There are different types of business expenses. Most will be categorized as capital (e.g., land, buildings, machinery), operating (e.g., office supplies, office equipment, office support staff), or cost of services (e.g., raw materials, delivery costs, training) expenditures. In addition, short-term and long-term business expenses are treated differently by the IRS.
Short-Term expenses are expenses incurred during the fiscal year and their value does not exceed one year. While they are generally deducted from business income at the end of the business’ fiscal year, they can sometimes be carried over to another year. These expenses may be allocated to the manufacturing and delivery of products and services or general business administration costs.
Long-term expenses are costs incurred by the business for goods and services that will be used for over 12 months. These expenses are often deducted as the business uses the product/service, and/or as the good/service declines in value and/or productivity. These expenses are usually deducted from the business’ gross income over years. However, certain IRS business deductions (e.g., startup costs, qualified business expenses bonus depreciation) allow businesses to deduct the entire value of something in the fiscal year it was purchased.
When itemizing your SaaS business expenses, it is important that you keep records of your expenses, maintain your receipts and invoices, and claim the expenses as business deductions on your tax return. Besides being consistent in how you itemize your business expenses, you must also have a long-term tax strategy that reduces your taxable business income.
Free 30-Min Strategy Session
By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.
If you lack in-house accounting personnel who can advise you on the best accounting strategies for your business and tax filings, then you should consult with professionals who have experience working with SaaS companies. These professionals will be familiar with the IRS tax loopholes, the pros and cons of different accounting and tax strategies, and how to classify expenses that can fall into more than one category.
Contact the Free Cash Flow (FCF) Agency for advice or assistance in maintaining your accounting records, putting together your financial statements, and filing your taxes.