Many 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.
Fortunately, it only takes a few minutes of daily or weekly attention to keep your business expenses organized. Here are a few tips:
Like all U.S. citizens, 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, according to the IRS. 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 may be able to do that more easily with organized receipts and accounting records, which are also good to have on hand in case you are ever audited. So, consider thinking 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.
Open separate bank accounts and credit/debit cards that you will use solely for handling business expenses, recommends the U.S. Small Business Association. It can be easier to keep track of business receipts if, for instance, you don’t use the same credit card to pay for both personal 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 consider keeping business records separate from personal. You might want to use a software program that’s specifically designed for small businesses ―there are many from which to choose ―but a simple spreadsheet may work, too.
Small-business accounting programs typically provide a “chart of accounts” that lists the most common tax-deductible business expense categories. According to the IRS, 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. Visit the IRS website for more detailed information about meals, travel and expenses.
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.) You may want to 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. Consider assigning expenses to categories (such as advertising, utilities, office supplies, etc.). At the end of the year, you’ll be able to print or download reports of your categorized expenses for your tax preparer or tax software. The IRS recommends that you save any business receipts (physical or scanned) for up to seven years, in case they are needed by the IRS or your tax preparer.
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 professional — a certified public accountant or a tax agent. These folks typically stay on top of changes in tax laws and can help make sure you’re getting the right tax breaks — 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.
Originally published October 2013.