Understanding how to track business expenses is one of the most important facets of accounting and bookkeeping.
The premise behind tracking your expenses is simple: the higher number of tax deductions your business can take, the lower your overall taxable profit and tax bill will be. However, in order to qualify for these deductions, you must be able to effectively track your business expenses.
Continue reading for a few simple tips you can use to track business expenses.
Keep All of Your Receipts
The quintessential key to understanding how to track business expenses is to keep all receipts. Your receipts can be the difference between you having to pay hefty tax penalties and you enjoying a low tax bill or even a return. Although you could potentially utilize other credible evidence or even argue the infamous "Cohen Rule," these methods are not guaranteed.
At the same time, you could rely on the IRS Publication 464, which says you are not required to keep receipts for expenses less than $75. However, who really wants to get into a fight with the endless resources of Uncle Sam and the IRS? Even if you do prove your case, it can cost you boatloads of money and time, which is more costly than keeping your receipts in the first place. One effective way to ensure your receipts are organized is to utilize an outsourced controller to help keep your receipts organized and provide financial service on demand.
Notate the Business Purpose on the Receipts
Making a note on the receipts about the business purpose is an extremely great practice for entertainment expenses as well as dining expenses. Although the purpose for buying a fax machine may be clear, it's a lot more difficult remembering who went to dinner with you at Olive Garden three years ago and the purpose of the dinner. Instead the best solution is to make a quick note about why you are at the restaurant or event and the names of the guests with you.
Make Digital Copies of Receipts and Keep Them at Least Six Years
The Internal Revenue Service can audit you and request documentation for up to six previous years. As a result, it's a great practice to make digital copies of all of your business expenses. When it comes to storing these digital receipts, you should always make multiple copies. If your hard drive were to crash, you will have lost years of valuable receipts and documentation.
With the wide number of cloud computing solutions, you should have no problem finding a great place to store your receipts. For instance, Google Drive offers free storage and the opportunity to store all of your scanned receipts. You can even share the files with your accountant for tax preparation with a simple click of a button.
How to Track Business Expenses with Your Smartphone
Today, everyone and their mother has a smartphone, and there is no reason you should ever have to worry about losing receipts. Before you take the snapshot, notate the purpose of the expenditure on the receipt. You can even take it a step farther and turn on cloud storage on your smartphone, so all of your receipts will automatically be backed up. There are mounds of smartphone apps for Android and iPhone designed exclusively for business owners looking to keep better track of their business expenses.
Track Business Expenditures with a Daily Journal
Even though this may seem like overkill, using a journal to track your business expenditures may be an effective solution. Instead of using a physical journal, you can keep an excellent record with the free Google Calendar or with Outlook. In addition to tax purposes, there are several other great reasons to keep a detailed schedule of your day. Even if you choose to update the details at the end of the day, this business journal because it could be integral in the event you are audited.
Avoid Spending Cash
If you are using cash for your expenses, you may be making a fatal mistake. Using cash makes it more difficult to document and keep good books for an audit. Cash is easier to spend, exponentially harder to track, and virtually impossible to reconcile with receipts. The best solution is to stick with credit cards and debit cards to track your receipts. In the end, reconciling credit and debit card transactions with receipts is significantly easier.
Do Not Rely Solely on Canceled Checks and Bank Statements
While credit card statements and canceled checks may be important, they are largely insufficient without receipts. For instance, if you spend $300 at Home Depot, a canceled check will not detail actually what you bought. Instead of purchasing pens and printer paper, you could have purchased the gadgets and movies, which are not legitimate business expenditures. Canceled checks and bank statements may be good for bookkeeping, but an IRS auditor wants details.
Get Help from Dennehy CPA with Business Expense Tracking
In the end, the better course of action for small business owners is to be prepared. Even when you are equipped with receipts and an excellent set of books, certain things may fall through the cracks. Stay ahead of Uncle Sam with the experience of the professional tax accountants of John F. Dennehy CPA in Long Island.
Contact John F. Dennehy CPA today for a free business expense and tax consultation.