Tracking Expenses

Track expenses to minimize tax owing

Now that you have your business formulated with an EIN, you should start tracking your expenses to minimize any tax owing. First, choose a method to organize your purchases so that you don’t have to bring a shoe box filled with crumpled receipts to your accountant. Second, understanding which expenses are deductible and categorizing them appropriately will minimize any headaches at the end of the year.

There’s an App for that!

There are a lot of truly fantastic apps that can make tracking your receipts and mileage easy as well. Be sure to check out MileIQ, Expensify, Smart Receipts and ABUKAI Expenses to name a few. The options and features are updated frequently, so keep on the lookout for new apps that make managing your business easier, smarter, and more accessible.

Should I buy Quickbooks?

It depends! If your business is small and you are only making a few purchases and deposits per month, then an excel spreadsheet may be your best option. Excel is also highly recommended for rental or investment properties because it is user friendly, customizable, and low cost.

Once you have outgrown excel, or if you are looking for better app integration, then Quickbooks Online may be the next step for you. Quickbooks Online is an intuitive way to manage your basic bookkeeping needs. A few of its more notable benefits is that you can download statements directly from your bank and set up rules to allocate expenses to the right category. It can also be accessed in real time by your bookkeeper and accountant so that any changes they make are updated immediately.
Quickbooks Desktop still has its place as well. If you have multiple business lines that you prefer to track separately or if your accounting needs are a more complex, Quickbooks Desktop may be the best choice for you.

Even though Quickbooks is a very popular choice and for good reason – be sure to check out some of the competitors as well. Compare the full costs that include all of the features you need to run your business. Many options are cloud-based, customizable and will integrate well with different apps. Make a list of what is truly important, do your homework and then make an educated decision on what is right for you.

What expenses are important

You should keep track of every purchase that is necessary to run your business. If you are unsure whether or not a particular expense is deductible, include the expense with a detailed description. Your bookkeeper or accountant can then help you to determine which expenses are appropriate for your type of business. Always keep your personal expenses separate from your business – ideally with separate bank accounts. If you mix business and personal accounts, for example paying for your child’s swimming lessons on the company card, then you could risk the ability to shelter your personal assets. If an expense is legitimately used partially for personal use and partially for business use, like your cell phone, then the best solution is to either track your actual usage or determine a reasonable allocation for your business.

There are three categories of expenses that require additional explanation:

Business Meals and Entertainment:

The 2017 tax changes have altered the rules on deducting business meals and entertainment. Businesses are no longer able to deduct any expenses related to entertainment, amusement, or recreation. Most meals are still 50% deductible including meals with clients, employee meals while traveling or at a conference, food for a board meeting or dinner provided to employees that are working late. Certain activities are 100% deductible including company wide parties, food and drinks that are free of charge to the public and meals and entertainments that are included as taxable compensation to an employee. Certain charges can fall into more than one category, so it is important to have detailed invoices to maximize your deductions.

Automobile Expenses:

There are two options available for recording auto expenses: either the standard mileage deduction or the actual expenses you incur. Tracking actual expenses, especially if your vehicle is used for both business and personal needs can be cumbersome. The standard mileage deduction is 57.5 cents per mile for 2020 and in most cases will allow for a greater deduction than your actual expenses. However, in certain circumstances, tracking your actual expenses may be better. If you are unsure and keeping track of both options is relatively painless, you can always track both options and pick the best one at the end of the year.

Home Office Expenses:

If you are a sole proprietor and run your business out of your home, you may be eligible to use the home office deduction. The IRS requires that the area used is a separate area and used exclusively and regularly for your business. Similar to vehicle expenses, the IRS allows for either a simplified option at $5 per square foot for business use of your home, or you can track your actual expenses. Keep in mind that if you track your actual expenses and decide to deduct depreciation on the portion of your home used for your business, when you go to sell your home you may owe tax on that deduction. This may still be the best option, but it is important to understand how your current decisions will affect your future taxes.

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