If being more organized in your business is one of your New Year resolutions, where better to start than making sure you are doing everything you can to track and record your small business expenses.
In that vein, this post will explain what everyday business expenses are and aren’t deductible, plus some handy tools and apps that can help you stay on top of your expense receipts.
What Can You Expense Anyway?
The answer often comes as a pleasant surprise to new and existing business owners. For example, If you drive for any business reason, be sure to record your mileage – it’s all deductible (see current IRS mileage rates here). That includes meeting customers, going to the bank for business reasons, making a trip to see your accountant, or even driving to the local office supplies store.
You should also keep receipts for everything you purchase related to your business, this includes office supplies, software, postage, equipment repair, furniture and computers. Membership expenses of professional associations and any educational expenses also qualify.
If your travel for business you can expense air, train or bus tickets, as well as the costs of lodging, taxi fares, tips, business-related calls, and 50% of meal costs.
If you do any client entertaining, 50% of these costs can be deducted.
Be sure to document everything associated with your business expenses – the IRS requires it. Keep receipts and maintain a centralized spreadsheet of all your trips, individual line items, dates and the reason for any travel/meals/entertainment, etc. Learn more from the IRS about recordkeeping and how to prove your expenses.
Separate Your Personal and Business Expenses
A good way to get organized and ease expense tracking is to apply for a business credit card and use this card for business purchases only. You can also deduct any interest charges against your business. This is also a great way to establish business credit. However, for true separation you’ll want to ensure that any business cards obtained only report to business credit agencies, not your own personal credit reports.
Take Advantage of Cloud Accounting Software to Track and Manage Expenses
Mobile and cloud apps are making it easier than ever to track and manage expenses from the point of receipt to full integration with accounting systems.
Expensify for Business is a popular choice for scanning expense receipts using a variety of smart phone devices. Users can track different expense types including cash, credit cards and bank transfers. It also allows managers to approve employee expense reports and enforce company expense policies and synchronize data with popular accounting tools. A free version is available for individuals.
Freshbooks is another option for cloud-based accounting that lets users download expenses directly from their bank account into their FreshBooks account with Automatic Expense Import. Any new expenses will be uploaded daily; sparing you from tedious and error-prone manual entry and giving you a useful snapshot into cash flow as well as any suspicious activity.
For QuickBooks users, Abukai might be worth consideration. Take a picture of your receipts using a smart device and the app spits out an expense report in Excel with receipt images attached in a PDF. It automatically assigns cost categorization, date, vendor, and more. It also integrates with Xero Accounting and Concur.
How to Report Your Expenses to the IRS
Now for the important stuff. Any expenses incurred during the business year should be reported on your annual federal income tax return (although you should also take expenses into account when calculating your quarterly estimated taxes). Here’s what you need to know about reporting those expenses:
If you are a sole proprietor or single-member LLC, you’ll report expenses in the “Expenses” section of Schedule C (Form 1040).
Business partners and multiple-member LLCs will report expenses in the “Deductions” section of Form 1065 (PDF).
Corporations will use the “Deductions” section of Form 1120 (PDF).
For more information about business expenses, visit the IRS.gov Deducting Business Expenses page.