Most small-business owners don’t exactly look forward to the nitty-gritty of managing their business expenses. However, staying on top of your company’s accounting tasks is a great way to make sure you’re getting every possible tax benefit for your company—and to reduce your stress when tax time eventually comes around.
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Fortunately, it only takes a few minutes of daily or weekly attention to keep your business expenses organized. Here are a few tips:
- First, know that good record-keeping benefits you. As you well know, you owe the Internal Revenue Service (IRS) taxes every year on your business profits. At the same time, the expenses you incur to run your company—from letterhead to office computers to labor—can be deducted from your profits to reduce them, and therefore cut the amount of tax you owe. To get credit for your expenses, however, you must keep good records and be able to prove to the IRS that money you spent running your business was “ordinary and necessary.” You can do that much more easily with organized receipts and accounting records, which are also good to have on hand in case you are ever audited. So, think of your record-keeping system as a way to make sure you get all the tax breaks to which you’re entitled, rather than simply an annoyance.
- Keep business and personal finances separate. Open separate bank accounts and credit/debit cards that you will use solely for handling business expenses. It’s much easier to keep track of business receipts if, for instance, you don’t use the same credit card to pay for both groceries and office supplies. If you need to find a forgotten business expense later in the year, you’ll only need to search through one account rather than several. If you use accounting or financial management software, you should again keep business records separate from personal. You might consider using a software program that’s specifically designed for small businesses, such as QuickBooks or FreshBooks, but a simple spreadsheet can work, too.
- Know what’s deductible. Small-business accounting programs supply you with a “chart of accounts” that lists the most common tax-deductible business expense categories. In general, allowable business expenses include things like business use of your car and home; supplies; meals and travel, as long as the primary purpose is business; payroll and subcontractors; capital equipment, and more. Be a bit careful when deducting things like meals and travel: If the primary purpose of your dinner out with friends is personal and you happen to talk a little business, you can’t deduct the cost of your meal. The same is true for travel. If you fly out of town to visit family and do a little work while you’re gone, the trip isn’t tax-deductible. More information from the IRS is available here.
- Stay on top of paperwork. In order to deduct most expenses, you’ll need to keep “adequate records” of the purchases—such as receipts, cancelled checks or bills. (For car expenses, keep a separate vehicle log and provide details of trips as you go along.) Spend a few minutes every day or at the end of the week entering receipts or downloading them from your bank or credit card website into your accounting program. Always assign expenses to categories (such as advertising, utilities, office supplies, etc.). At the end of the year, you’ll be able to easily print or download reports of your categorized expenses for your tax preparer or software program. You should also save any physical business receipts (actual or scanned) for up to seven years, in case the IRS or your tax preparer needs to see them.
- Get help when you need it. It can be tough to figure out how to amortize business equipment, or whether to claim a home-office deduction. When in doubt, hire a pro—a certified public accountant or a tax agent. These folks stay on top of changes in tax laws and can make sure you’re getting all the tax breaks you can—as well as help keep you tax-penalty free.
When it comes to managing your business expenses, it pays to stay ahead of the game.
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