Eight tips for organizing your business expenses and keeping records.
When you run a business, you have a lot to manage. If there isn't a person in your face that keeps you on top of a task, it can be easy to keep putting it off until tomorrow, Friday, or next week... and soon you have a big stack to work with.
Although this strategy works for many projects, it can lead to problems in the financial area. If you are audited, you will need a history for every transaction or you will suffer the consequences. Your business expenses are not something you can make up or give your most educated guess. They must be accurate and you must have the evidence to back them up.
The best and least stressful way to keep your business expenses accurate is to maintain what the IRS calls a contemporary approach. It's basically an organized approach to tracking your expenses as they arise. Here are eight tips to help you manage your company's expenses and finances and prepare for an audit.
1. Choose a strategy that works for you
You can outsource your finances by hiring an accountant or a "QuickBooks expert". The cheapest, but the most time-consuming solution is to track your expenses yourself, either manually or electronically.
2. Know what to track
You will want to track the following. Make sure you have a strategy for each.
- Cash flow
- Expenses
- Donations/charitable giving
3. Store your business expense information in one place
You are required by law to keep all tax records for at least three years. It can be a digital copy in the cloud or a physical copy. You can also store your expenses in your subscription service application.
4. Separate your business and personal accounts
Having a separate bank account for your small business will help you avoid confusing your personal expenses with your business expenses. Having a credit card connected to the business account will also allow you to easily send business expenses through that account.
5. Use technology and apps to streamline the process
Traditionally, professionals would keep all business receipts in a manila envelope. There are many electronic and paperless options these days that sync with your accounts or allow you to upload photos of receipts. Choose a platform that you are comfortable with and that is not prohibitively expensive.
- Microsoft Excel offers many templates for tracking cash flow, revenue, and more. It's a great option for small businesses without too many transactions.
- QuickBooks is a widely used platform operating as a subscription service that large organizations and businesses use to track business expenses.
- Other plans to consider include Expensify, Certify, and Zoho Expense (a cheaper option).
Additionally, you can use apps to help you track a particular category of expenses. Google Maps can help you recreate and track your business mileage. MileIQ is a great app to accurately track your mileage by tracking your trips for business trips, and it can generate a report at the end of the year.
6. Understand what is considered a franchise
This is one of the main areas that trigger disputes, so it is essential to understand what is admissible and what is not. According to the IRS, business deductions must be "both ordinary and necessary." In other words, it is a common expense for businesses in your industry and necessary to run the business. This largely includes office expenses such as printer paper, monitors, computers, pens, etc.
If you're not sure if an expense qualifies as a deductible, track it. Later, your tax advisor can guide you in determining whether to include this expense.
7. Remember: Only your business can make business deductions
If employees incur expenses on behalf of your business, their option is to discuss reimbursement with you. Employees are not able to make business deductions on their personal taxes. This rule has changed in recent years, so some people may find the consequences confusing.
For example, people can only write off having a home office if they are self-employed. Otherwise, employees should discuss reimbursement with their employer.
8. Understand how to track donations
Your charitable donations are not deductible business expenses if you are a sole proprietor reporting your business income on a Schedule C, but they may potentially be subject to an itemized deduction on your personal return. If a donation is made in exchange for sponsorship, it may be considered advertising or marketing rather than charity.