Understanding Business Expenses

Leen Shami

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November 10, 2022

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All companies and businesses will incur business expenses, but how can you know what exactly is considered business expenses? And how will the introduction of UAE corporate taxes affect business expenses and income reports?

What are business expenses?

Business expenses are costs a business incurs to run the business properly. In simpler terms, they're expenses made by the business for the business.

With the UAE introducing corporate tax laws in 2023, it's crucial for businesses to be able to track and categorize their business expenses, as some of them may be tax deductible.

While the IRS may divide business expenses into ordinary and necessary business expenses, the UAE takes a different approach.

Ordinary business expenses are anything that is "common and accepted" to a business, whereas necessary expenses are anything that is "helpful and appropriate" to a business but not essential.

The federal tax authority in the UAE does not take a similar approach and only considers business expenses as tax deductible or not. We will discuss this in a later section.

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Examples of business expenses

Business expenses include a wide range of expenses, from insurance to office space, to online subscriptions, such as Zoom, Figma, or Adobe.

Let's break it down; if a design agency bills a client AED 120K per year, that doesn't mean they made a profit of 120K. When a business brings in revenue, it must account for the business expenses made to provide its clients with its services. These services include digital software subscriptions, office rent, employee wage, and/or wifi fees.

Here are some examples of the most common business expenses:

Advertising and marketing
Business travel (fuel, airfare, taxis, etc.)
Employee costs (payroll, salaries, insurance, perks, etc.)
Employee equipment (such as laptops, monitors, phones, etc.)
Legal fees
Office space rent & utilities
Software subscriptions

While many more expenses are considered business expenses, these are the ones most businesses will incur.

Types of business expenses

When setting up a budgeting plan, business expenses play a vital role in keeping the businesses' financials in check. When preparing a budgeting plan, finance teams typically begin by looking at the three types of business expenses incurred.

These business expenses include:

3 types of business expense; fixed, variable, and periodic

1. Fixed expenses

Fixed costs are costs that do not change; they happen at known intervals, such as month to month.

With predictable costs, budgeting is more straightforward, as these costs are always expected and never come as a surprise.

Examples of fixed expenses include:

Rent
Employee payroll/salaries
Utility bills
Insurance

2. Variable expenses

Variable expenses are business expenses that change from month to month. These costs vary depending on a company's production or sales volume; if production or sales increase, variable expenses increase, and if production or sales decrease, variable expenses decrease as well.

Variable expenses are typically a business's largest expense, as some may be unexpected or unaccounted for.

To calculate the variable cost, multiply the quantity of the output by the variable cost per unit of output.

Total variable cost = Total quantity of output X Variable cost per unit of output

Examples of variable expenses include:

Shipping expenses
Sales commissions
Raw materials (used in production)

3. Periodic expenses

Periodic expenses are business expenses that happen infrequently or, sometimes, semi-regularly.

Typically, periodic expenses happen on a quarterly or yearly basis, such as annual car insurance, but can also come as a surprise, such as a company car repair.

Budgeting can be tricky with periodic expenses, especially when expenses are infrequent.

Examples of periodic expenses include:

Maintenance & repairs
Merger and acquisitions costs
Major equipment purchases

Profit and loss statement report

A profit and loss (P&L) statement, also known as an income statement, is commonly used when businesses record business expenses. Through the P&L, businesses can determine their taxable income. This is especially important for UAE businesses with an annual net income above AED 375,000.

The 3 categories of an income statement include the following:

1. Costs of goods sold (COGS)

Costs of goods sold are the costs associated with the production of goods sold by a company. This typically includes direct costs only, such as materials used and labor costs to create the goods sold. Indirect expenses are not calculated regarding COGS; these include sales and marketing.

For a business to determine gross profit, the costs of goods sold must be deducted from its revenue. They also affect how much profit a company makes on its products.

2. Operating costs

For a business to run, operating costs are unavoidable.

Generally speaking, operating costs relate to a business's daily maintenance and administration. These include costs such as COGS, payroll, rent, and overhead costs. However, non-operating costs, such as interest and investments, are excluded from an income statement.

An income statement reflects operating income after operating costs are deducted from revenue.

3. Depreciation

When accounting for depreciation, there are two types to look at:

a. Depreciation expense

A depreciation expense is a loss in value of fixed assets that companies record through depreciation. During the period you use an asset, its value decreases, and the price you originally paid for it is allocated over time.

An example would be a physical asset that loses value over time, such as a car or vehicle.

b. Accumulated depreciation

Accumulated depreciation refers to the accumulated depreciation charge a specific asset has taken as it wears down or becomes obsolete. Accumulated depreciation is shown on the balance sheet, unlike depreciation expenses reported on the income statement.

Personal and business expenses

Knowing the difference between personal and business expenses incurred is vital, especially with the UAE corporate tax law coming up. Business expenses can be used to lower a business's taxable income; however, personal expenses incurred are not considered deductible expenses.

So, what's the difference between personal and business expenses?

Personal expenses

Personal expenses are purchases made for personal reasons and cannot be used as deductible expenses.

If you make a purchase for the business but add in an item for personal use, it is crucial to have two transactions to avoid mishaps coming your way. Having two receipts will help you record and store the receipt so the business expenses can be used as deductible expenses.

Business expenses

If you're making purchases that benefit the business, such as driving more revenue, they can be considered business expenses. When making business expenses, it's essential to keep a record of the purchase by storing the receipts. By doing so, you can use these business expenses to lower your tax liability by deducting the amount from your income.

Tax deductible expenses

We've reviewed personal expenses, the 3 types of business expenses, and what goes into P&L statements. But which of these are considered tax-deductible expenses? In a nutshell, all the above, other than personal expenses. Let's delve deeper into tax-deductible expenses.

Tax deductible expenses are business expenses that help businesses generate revenue. These expenses are deducted from the company's income before applying any taxes.

Examples of tax-deductible expenses:

Administration fees
Advertising and marketing
Bank charges
Insurance
Legal fees
Maintenance and repair
Office expenses
Office rent
Payroll/salaries
Supplies
Travel and transportation
Utilities

Non-deductible tax expenses

Non-deductible tax expenses cannot be deducted from a company's income.

In the UAE, there are 3 main categories for non-deductible tax expenses:

1. Related party payments from the mainland to a Free Zone Person

The related party payments made to a Free Zone Person that is taxed at 0% on receipt of the income will not be deductible for CT purposes. However, if the payment is attributed to a mainland branch of the Free Zone Person, the related party can claim a deduction.

2. Entertainment expenses

Because these types of expenses often also have a non-business or personal element, businesses can deduct up to 50% of the expense incurred to entertain customers, shareholders, suppliers, and other business partners.

3. Other expenses

No deduction will be allowed for certain specific other expenses, such as

Administrative penalties
Recoverable VAT
Donations paid to an organization that is not an approved charity or public benefit organization.

How to keep track of business expenses

To maintain your business, it's important to track your business expenses. There are several ways to track business expenses; however, you will need to establish a system to account for costs and accurately manage your business.

Here are 6 steps to keep track of your business expenses:

1. Open a business bank account

A business bank account should be completely separate from your personal checking account and must only be used for business expenses/purposes. This will help you manage your business expenses easily and give you eligibility for business credit cards or, even better, Pluto corporate cards.

2. Select an accounting system

If you haven't chosen an accounting system yet, choosing one that's appropriate for your business is vital. Some businesses opt for spreadsheet software, such as Microsoft Excel; however, to simplify the accounting process, we recommend going for accounting software that will automate the process for you.

3. Choose cash or accrual accounting

Choosing cash or accrual accounting typically depends on the size of your business.

Small businesses can use cash accounting and record transactions when they happen, as volumes are small.

For bigger businesses, accrual accounting is essential, as they have high volumes of transactions. With accrual accounting, only the product sold is recorded, rather than payment received for the product. Similarly, an expense is recorded when a bill is received rather than when an invoice is paid.

4. Store receipts

Storing receipts is essential, as they are proof of business expenses made. You can store receipts by scanning them, taking photos, and keeping digital copies.

5. Regularly manage and record expenses

It's important to track spending and categorize them accordingly. Examine every transaction to compare these business expenses to your revenue.

6. Consider subscribing to an expense software

For some businesses, it is worth looking into expense management software to automate the process of tracking, managing, and recording expenses.

Tracking business expenses with Pluto

If you choose to go for an expense management software, it will help you automate the tracking, managing, and recording of expenses. But Pluto's expense management software offers more than just tracking, managing, and recording your business expenses.

Pluto will keep detailed records of all your expenses, reduce your taxable income, and help you if you are audited or need to reconcile accounts.

With Pluto, you'll be able to do the following:

Store receipts

Upload your receipt through Whatsapp or the Pluto app as soon as a business expense is made
Store all digital receipts on Pluto's software

Record business expenses

All transactions are recorded on the software automatically when using Pluto corporate cards
Petty cash is automated, meaning expenses are recorded on the spot
If an expense is made using an employee's personal card, the expense is recorded automatically as soon as they file for a reimbursement

Track business expenses

All business expenses made by employees can be tracked through Pluto's dashboard
Daily, weekly, or monthly expense reports are available in real-time

Accounting integrations

Pluto integrates with all major accounting platforms

Auto-categorization

All expenses recorded are auto-categorized through Pluto's AI technology
Pluto categories are synced to your GL codes

Create tax codes

Create and activate tax codes that sync with your accounting platform to mark expenses as tax deductible or not

Create and activate tax codes on Pluto's dashboard

Business expense FAQs

More often than not, business expenses have many different rules. Here are the commonly asked questions about business expenses:

How do I categorize expenses?

Most accounting software already has business categories incorporated in the software, so you can use them and amend them as needed.

Pluto's expense management software allows integrations with significant accounting platforms and automatically syncs to your GL codes and chart of accounts.

Do fuel costs count as business expenses?

If the fuel cost was made for business purposes, such as travel for a client meeting, then yes, it is counted as a business expense and can be considered tax deductible.

However, driving to and from work is rarely considered a business expense.

Can business expenses be carried forward?

The UAE corporate tax law details report still hasn't come out yet. We will update this question once the Federal Tax Authority shares more details in the UAE.

Is personal expenses tax deductible?

No. Personal expenses are not tax deductible.

Is my rent deductible if I am self-employed and my home is my office?

In some cases, yes, it is possible if you are self-employed, but only a certain percentage of your rent will be considered a business expense, for example, 25% of your rent.

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Updates

March 23, 2023

•

Leen Shami

Ramadan Benefits in the Workplace: A Guide to the UAE and MENA Region

The month of Ramadan provides HR Managers with the opportunity to take the initiative in their organization and implement a benefit program for employees and to remind them to support their Muslim colleagues during this holy month.

What are the benefits of implementing a Ramadan employee benefits program?

Employees who observe Ramadan may require special considerations in order to maintain a high level of performance.

The main goal of any corporate environment is to get the best possible results, but this can only be achieved if your team is given a supportive environment.

During Ramadan, HR managers and employers should consider implementing employee benefits programs to ensure that their employees are able to fulfill their religious commitments while feeling supported by their companies.

By doing so, you will help ensure that every member of your team has access to the resources they need to be productive and successful.

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Employee benefits program

Flexible working hours

Allow employees to come in late or leave early during Ramadan, modify their hours so they can work when they feel the most energized,and be able to take part in religious activities such as prayers while still being productive at work.

Remote or hybrid work

Remote or hybrid work can provide employees with more flexibility and autonomy to manage their work and religious obligations during Ramadan, allowing them to maintain their productivity and well-being while observing the holy month's spiritual practices.

Set up dedicated prayer spaces

Having dedicated prayer spaces can help employees maintain their spiritual practices during the workday. This is particularly important during Ramadan when employees may need to perform their daily prayers. Providing these spaces can make it easier for employees to observe their religious obligations without having to leave the workplace or worry about finding a suitable location to pray.

Accommodate dietary needs

Provide employees with food options that meets all dietary needs, so they can break their fast at the office if needed.

Examples of foods that are commonly used to break the fast:

Dates
Dried fruits
Ayran (yogurt drink)
Soups
Sambusak ( pastry filled with cheese or meat)

Inclusivity

Promote open dialogue between employees of different faiths to foster an inclusive workplace environment. Consider arranging a presentation for those who would like to learn more about Ramadan and Islam.

Gift and Bonus Programs

Corporate gift and bonus programs during Ramadan can take many forms, but the underlying purpose is to show appreciation to employees for their efforts and to strengthen the relationship between the employer and employees.

Here are some common examples of corporate gift and bonus programs during Ramadan:

Eid al-Fitr bonus

It could be an additional incentive where employers give their employees an additional payment or bonus at the end of Ramadan to celebrate Eid al-Fitr, which marks the end of the month of fasting.

Corporate gifts

Companies may offer gifts such as food hampers, prayer mats, and other religious items to their employees during Ramadan as a way to show appreciation and respect for their faith.

You could also delight your employees with a gift that they can use to enjoy dinner with their families. One way of doing this is by issuing Pluto corporate cards for your employees with an allocated budget on them. For e.g., you can issue a your employee a Pluto corporate card with a 500 AED spend limit to be used a restaurant of their choice.

Charitable donations

Some companies may choose to make charitable donations on behalf of their employees during Ramadan as a way to give back to the community and show solidarity with those in need.

You can add on to that by giving your employees the opportunity to pick what charity they would like the company to donate to.

It's worth noting that corporate gift and bonus programs during Ramadan should not be seen as an obligation or a substitute for fair compensation and benefits throughout the year. Rather, they are a way to show appreciation and strengthen the relationship between employer and employees.

Iftar and Suhoor Programs

Iftar and Suhoor are the two main meals that Muslims consume during Ramadan.

Iftar is the meal that is eaten after breaking the fast at sunset, while suhoor is the pre-dawn meal that is eaten before the fast begins.

These meals have significant cultural and religious importance, and hosting iftar and suhoor programs can provide a sense of community and inclusivity in the workplace during Ramadan.

Importance of iftar and suhoor programs

Iftar and suhoor programs provide the opportunity for employees to come together and share in the spiritual significance of Ramadan.

These types of activities are also beneficial for team building, as they create an atmosphere of camaraderie among colleagues and foster a stronger work culture.

Its importance can be categorized into three main points:

Connection: Sharing a meal with colleagues can help to strengthen connections and build relationships, fostering a sense of community in the workplace.
Cultural awareness: Hosting iftar and suhoor programs can provide an opportunity for employees of different backgrounds and faiths to learn about Ramadan and its traditions.
Appreciation: Providing meals for employees during these times shows that the company values and appreciates its employees and their religious beliefs.

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Examples of iftar and suhoor programs for employees and how to host one:

Potluck iftar: Organize a potluck iftar at the office, where employees bring their favorite dish to share with their colleagues.
Company-sponsored iftar: Host an iftar event at a restaurant, where the company provides food and drinks for employees to break their fast [see list of recommended restaurants below].
Virtual iftar: For remote workers or those who cannot attend in person, host a virtual iftar.
Charity iftar: Host an iftar event where a portion of the proceeds goes to a charity or non-profit organization. (Please make sure you are in line with UAE charity regulations before doing so. Learn more here)
Catered iftar: Hire a catering company to provide a full meal for employees to break their fast [see list of recommended catering companies below].
Suhoor breakfast: Host a breakfast event before the start of the workday for employees who are fasting.
Iftar meal delivery: Deliver meals to employees who are working late or unable to attend the in-person event.
Ramadan decorations: Decorate the workplace with Ramadan-themed decorations to create a festive atmosphere.
Ramadan trivia: Host a trivia game related to Ramadan and its traditions during the iftar or suhoor event.
Ramadan volunteer day: Organize a volunteer day where employees can give back to the community during the month of Ramadan.

Prayer programs

Observing taraweeh and Laylat al-Qadr during Ramadan helps Muslims to deepen their faith and spirituality, and it provides an opportunity to reflect on their actions and intentions throughout the year.

An employee prayer program during Ramadan can have numerous benefits for companies and their employees, including promoting diversity and inclusion, improving morale and relationships, and fulfilling social responsibility.

Taraweeh

Taraweeh prayers are additional prayers that Muslims perform during the holy month of Ramadan after the Isha prayer. These prayers are performed in congregation and typically consist of 8 to 20 cycles of prayer, depending on the tradition.

Companies can host taraweeh prayers at a mosque or the office on specific days of the week, such as Tuesdays, to create a sense of belonging and inclusivity among employees.

Laylet al-Qadr

Laylat al-Qadr, also known as the Night of Power, is considered to be one of the holiest nights in Islam. It is believed to be the night when the first verses of the Quran were revealed to the Prophet Muhammad, and it is said to be a night of forgiveness and mercy.

With laylat al-qadr being the most important night of Ramadan, it is important for your company to offer benefits during this day, such as:

Consider giving the following day as PTO, since most Muslims stay up all night in prayer and reflection.
Offer a transportation stipend to the mosque in order to show the company’s support of their employees religious beliefs.

You can do so using Pluto’s platform by offereing a one-time purchase card with a set limit that can only be used with taxis, Careems, Uber or for gas.

Ramadan email templates that can be shared with employees

There is a lot to take care of when preparing for Ramadan. We've put together some sample email templates for various corporate initiatives to make your job easier.

Email Template 1: Announcing flexible working hours during Ramadan

Subject: Ramadan Working Hours‍

Dear [Employee Name],‍

As the holy month of Ramadan approaches, we would like to inform you that we will be implementing flexible working hours during this time to accommodate those who will be observing the fast.‍

Our office will be open from [start time] to [end time]. We understand that some employees may need to adjust their schedules due to the early morning and evening prayers, as well as breaking their fast in the evenings.‍

If you need to adjust your working hours, please speak to your line manager, who will be happy to discuss the best option for you.‍

Our company values diversity and inclusivity, and we hope that this initiative will help our employees observe Ramadan comfortably.‍

We wish all our staff observing Ramadan a blessed month, and may you get the best out of this spiritual journey.‍

Ramadan Mubarak!‍

Best regards,

[Your Name]

Email Template 2: Announcing company charitable donations during Ramadan

Subject: Ramadan Charitable Donations

Dear [Employee Name],‍

As we approach the holy month of Ramadan, we would like to remind you that our company values generosity and charitable giving. In line with this, we have decided to make a donation to [charity name], which supports [cause].‍

We believe that this is a great opportunity to give back to those in need and demonstrate our commitment to making a positive impact in the community. We hope that this donation will inspire you to consider making a charitable contribution during this holy month.‍

Thank you for being part of our company, and we wish you a blessed Ramadan.‍

Best regards,

[Your Name]

‍

Email Template 3: Inviting employees to an Iftar meal

Subject: [Company Name] invites you to an Iftar Meal

Dear [Employee Name],‍

We would like to invite you to an Iftar meal on [date and time], which will be held at [location]. This event is an opportunity for our employees to come together and break their fasts as a community.‍

Please RSVP to [email/phone number] by [RSVP deadline] to confirm your attendance. If you have any dietary requirements, please let us know, and we will do our best to accommodate them.‍

We hope that this event will be an enjoyable experience for everyone and that it will help to strengthen our company culture.‍

Thank you for your hard work and dedication, and we wish you a blessed Ramadan.‍

Best regards,

[Your Name]

Corporate gifting list

Sabr prayer mats (https://www.thesabrmat.com/)
Bateel dates (https://bateel.com/)
Ramadan themed candles (https://silsal.com/)
Kitchen gift set (https://sittisoap.com/)
Olive oil (https://almisk.ae/)

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Iftar or suhoor restaurant list

Asateer Tent at Atlantis the Palm
Sufra
The Majlis
Allo Beirut
Hutong
Terrace on the Corniche at St. Regis Abu Dhabi
The Royal Majlis
Eunoia By Carine
Bombay Bungalow
Brasserie Boulud
Ibn AlBahr
Al Falak Ballroom
Karam Al Bahr

Company catering list

Ogram
Blast catering
Eat catering
The Majlis
Dish

Conclusion

Ultimately, providing Ramadan benefits demonstrates an employer and HR's commitment to promoting diversity and religious freedom in the workplace.

It also helps create a sense of community among employees that can lead to increased morale, collaboration, communication, and overall productivity.

By offering an employee benefits program during the holy month of Ramadan, employers can show their dedication to creating a supportive and inclusive environment for all of their employees, regardless of faith or background.

Ramadan benefits can thus be an important part of workplace culture, helping to create a positive atmosphere in which everyone feels welcome, respected, and valued.

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Corporate Cards

October 10, 2022

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Leen Shami

Corporate vs. Business Credit Card: What is the Difference?

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Procurement

December 4, 2023

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Mohammed Ridwan

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Contents

Understanding Business Expenses

What are business expenses?

Examples of business expenses

Types of business expenses

1. Fixed expenses

2. Variable expenses

3. Periodic expenses

Profit and loss statement report

1. Costs of goods sold (COGS)

2. Operating costs

3. Depreciation

a. Depreciation expense

b. Accumulated depreciation

Personal and business expenses

Personal expenses

Business expenses

Tax deductible expenses

Non-deductible tax expenses

1. Related party payments from the mainland to a Free Zone Person

2. Entertainment expenses

3. Other expenses

How to keep track of business expenses

Tracking business expenses with Pluto

Store receipts

Record business expenses

Track business expenses

Accounting integrations

Auto-categorization

Create tax codes

Business expense FAQs

How do I categorize expenses?

Do fuel costs count as business expenses?

Can business expenses be carried forward?

Is personal expenses tax deductible?

Is my rent deductible if I am self-employed and my home is my office?

Find out how much your business can save with Pluto

Learn how Pluto is helping Keyper to eliminate petty cash spending and optimize spend management

Get started with a free account

You may also be interested

Ramadan Benefits in the Workplace: A Guide to the UAE and MENA Region

What are the benefits of implementing a Ramadan employee benefits program?

Employee benefits program

Flexible working hours

Remote or hybrid work

Set up dedicated prayer spaces

Accommodate dietary needs

Inclusivity

Gift and Bonus Programs

Eid al-Fitr bonus

Corporate gifts

Charitable donations

Iftar and Suhoor Programs

Importance of iftar and suhoor programs

Prayer programs

Taraweeh

Laylet al-Qadr

Ramadan email templates that can be shared with employees

Email Template 1: Announcing flexible working hours during Ramadan

Email Template 2: Announcing company charitable donations during Ramadan

Email Template 3: Inviting employees to an Iftar meal

Corporate gifting list

Iftar or suhoor restaurant list

Company catering list

Conclusion

Corporate vs. Business Credit Card: What is the Difference?

What is a Business Credit Card?

What is a Corporate Credit Card?

What is a Pluto Card?

Virtual credit cards

Physical credit cards

Benefits and perks

Business & corporate credit cards:

Pluto cards:

Why are Business Credit Cards and Corporate Credit Cards Different?

Expense management tools

Corporate and business card fees

Annual fees

FX fees