When you are running a business, you have a lot to manage. If you don’t have someone in your face who is forcing you to stay on top of a task, it can be easy to postpone it until tomorrow, Friday, or next week… and soon you’ll have one to work with. There will be a big pile.
While this strategy works for many projects, it can lead to trouble in the financial sector. If you’re audited, you’ll need a track record for each transaction or outcome you encounter. Your business expenses are not something you can make up or give your best-educated estimate. They need to be accurate, and you must have evidence to support them.
The best and least stressful way to keep your business expenses accurate is to keep the IRS up-to-date. It is basically an organized approach to keep track of your expenses as they happen. Here are eight tips to help you manage your business expenses and finances and make sure you’re prepared in case of an audit.
1. Pick a Strategy That Works for You
You can outsource your finances by hiring a bookkeeper or “QuickBooks specialist”. The more cost-effective but time-intensive route is to track your expenses yourself, either by hand or electronically.
2. Know What to Track
You will want to track the following items. Make sure you have a strategy for each.
- cash flow
- Expense
- to donate
3. Store your business expense information in one place
The law requires that you keep all tax records for at least three years. This can be either a digital copy or a physical copy in the cloud. You can also store your expenses in your subscription service app.
4. Keep Your Business and Personal Accounts Separate
Having a separate bank account for your small business will help you avoid mixing up your personal expenses with your business expenses. Having a credit card linked to a business account will allow you to easily send business expenses through that account.
5. Use Technology and Apps to Help Streamline the Process
Traditionally, professionals would place all business receipts in a manila envelope. Nowadays, there are many electronic, paperless options that sync with your accounts or allow you to upload photos of receipts. Choose a platform you’re comfortable with that isn’t cost-prohibitive.
- There are many templates available for tracking cash flow, income and more in Microsoft Excel. This is a great option for small businesses without a lot of transactions.
- QuickBooks is a widely used platform that serves as a subscription service that large organizations and companies use to keep track of business expenses.
- Other subscriptions to consider include Expensify, Certify, and Zoho Expense (a lower-cost option).
Additionally, you can use apps to help you keep track of expenses for a particular category. Google Maps can help you recreate and match your business profit. MileIQ is a great app for accurately tracking your mileage by tracking your movement for business trips, and it can generate a year-end report.
6. Understand What Qualifies as a Deductible
This is one of the key areas that triggers disputes, so it is important to understand what qualifies and what doesn’t. According to the IRS, business deductions must be “both ordinary and necessary.” In other words, it is an expense that is common to businesses in your industry and necessary to run the business. It largely includes office expenses like printer paper, monitor, computer, pen etc.
If you’re unsure whether an expense is deductible, track it. Later, your tax advisor can guide you in deciding whether to include that expense.
7. Remember: Only Your Business Can Take Business Deductions
If employees are incurring expenses on behalf of your business, their option is to discuss reimbursement with you. Employees are not able to take business deductions on their personal taxes. This rule has changed over the years, so some people may find the results confusing.
For example, people can write at home having an office only if they are self-employed. Otherwise, employees should discuss reimbursement with their employers.
8. Understand how to track donations
If you are a sole proprietor reporting your business income on Schedule C, your charitable donations are not deductible business expenses, but they could potentially be an itemized deduction on your personal return. If a donation is accomplished in exchange for a sponsorship, it may be classified as advertising or marketing rather than charity.
Primary Tax Adviser, Berger Financial Group
Andy Gilund, CPA, MBT, is a primary tax advisor and CPA for Berger Financial Group. He has over a decade of experience in accounting and helps clients reduce their tax burden. Andy holds a BS in Accountancy and holds a Master of Business Taxation degree from the University of Minnesota Carlson School of Management. She is active with the Minnesota Society of CPAs and the Volunteer Income Tax Assistance (VITA) program.