How do track my small-business expenses for tax deductions?
As a small business or startup, keeping track of your expenses is essential. Come tax time, your business-related purchases qualify as tax deductions, reducing the total amount you owe on your return — but only if you’ve kept a record of them.
Thankfully, there are a variety of expense tracking options for you to choose from, whether you’re interested in accounting software or prefer to go the manual route.
What is Small-Business Expense Tracking?
Small-business expense tracking is how you record and manage any business-related purchases you make, such as:
- Office supplies
- Business travel expenses
- Marketing and advertising costs
- Software subscriptions
- Home office furniture
- Tickets to professional events and conventions
During tax season, the IRS considers many of these purchases as write-offs, allowing you to deduct them from your tax return. However, for these items to qualify as tax deductions, you will need to have a record of the purchase in the form of a physical or digital receipt.
You should keep track of your business expenses if you’re a small-business owner, startup founder, freelancer, or otherwise self-employed.
Why Track Business Expenses?
Tracking your business expenses comes with many benefits, including:
1. Reducing Your Small-Business Taxes
If you work for yourself, you already know the amount you have to pay in self-employment taxes each year can be significant. If you can reduce it, even by a small amount, that equates to more money in your pocket.
Keeping records of your deductible expenses is one of the easiest and most straightforward ways to reduce your tax return. By simply hanging on to your business-related receipts, you can save yourself a lot of money.
2. Demonstrating an Accurate Profit Margin
Tracking small-business expenses also helps to give you a more accurate understanding of your business’s profit. By monitoring both incoming and outgoing cash flow, it’s easier to see how much your business is making after your costs have been deducted.
If you only monitor profit, you’ll never really know whether your business is financially viable or not.
3. Organizing Your Business Records
Keeping clean, clear, and well-organized business records is the best way to understand and track your company’s growth over a long period of time. Tracking expenses can help you to:
- Determine where you have opportunities to reduce your small-business expenses
- See how your costs have increased or decreased based on the market or seasonality
- Decide when and how to scale your business
- Negotiate or reevaluate expenses
Even freelance records are important because they separate business costs from client-related expenses that qualify for reimbursement.
Plus, if you ever encounter a legal issue related to your business, detailed records will strengthen your case and show that you run an honest and lawful company.
How to Track Small-Business Expenses
You have a variety of different options when it comes to choosing a method to track expenses, from accounting software and applications to business banking accounts and manually recording costs.
Choose the method that works best for you and your business based on your needs, budget, and preference.
1. Accounting Software and Apps
One of the easiest methods for tracking expenses is by using accounting software. Many platforms can connect with your bank account to automatically identify and record business purchases as well as allow you to upload photos of receipts or manually enter expenses.
Some of the most popular business expense tracking platforms include:
Most of these platforms offer both a desktop version and mobile app, facilitating expense tracking in the office and on the go. This is especially convenient if you’re tracking business expenses while out of town.
Accounting software platforms and apps work best for businesses that want to use them to manage multiple aspects of their business, such as invoicing, facilitating payments, time tracking, and payroll.
Most accounting platforms also come with a monthly or annual fee, which typically qualifies as a tax deduction.
2. Business Banking Accounts
Keeping track of your business expenses is a breeze if you only make purchases using a company credit card or debit card. This way, all your purchases are in a separate bank account, making your expense reports easy to compile, review, and organize.
If you choose to open a business bank account through an online bank like Lili, make sure to keep it separate from your personal finances. Only use your business credit card or debit card to make business purchases. Otherwise, it defeats the purpose of having different accounts.
If you decide to go this route to manage your business finances, it’s recommended you open:
- A business credit card
- A business checking account
- A business savings account
This way, you can deposit payments from clients and customers into your checking account and use it to pay for purchases made on your company credit card. Leftover business income can go into your savings account. This setup keeps your business finances completed separate from your personal assets.
If you only have a handful of clients or your expenses are relatively few and far between, keeping things simple may be the best option. Tracking expenses manually is as simple as creating a spreadsheet in Microsoft Excel and inputting expense details as you make purchases.
You can make your spreadsheet as detailed or as simple as you’d like. For example, you can include item descriptions, dates, and amounts as well as a total before and after taxes. Or, you can simply list items and their costs.
Keeping Digital Receipts
Digital receipts are easier to track than their paper counterparts, but if you use multiple email addresses, bank accounts, or payment methods, keeping your expense records organized can be challenging. Three popular options include:
1. Expense Tracking Software
Most expense tracker apps and platforms help you to store digital receipts by either automatically recording them through your bank statements or letting you upload them yourself.
Many apps also allow you to categorize your business purchases, making them easier to input and record when preparing your income tax return.
Although apps and software are generally more expensive compared to other methods, they handle a lot of the administrative work for you. So, if you’re looking for a hands-off approach to keeping your digital expense records organized and well-managed, an app is probably your best bet.
2. Company Expense Email
An effective method is to use a single email address — preferably one associated with your business — to make all of your business-related online purchases. All the digital receipts associated with your company will be directed to your business email inbox.
To record paper receipts as well, take a picture of them or scan them and forward the image to your email address.
You can make this inbox accessible to your bookkeeper or accountant directly or forward your receipts to them as you make purchases. Even if you do your own bookkeeping, having your tax-deductible expense records in one place (and organized by date) will make your life easier.
Additionally, you won’t have to pay any additional costs outside of what you already pay to host your email account.
3. Cloud Storage
Your third option is to scan or take pictures of receipts and upload the images to the cloud storage of your choice, such as:
For digital receipts, you can take a screenshot, save it as an image, and upload it manually. Although not the most convenient option, cloud storage is typically free, which makes it an ideal choice for the budget-conscious.
Keeping Paper Receipts
Paper receipts are harder to manage than digital versions, but almost every small-business owner will have at least a few of them. Paper receipts usually come from:
- Gas stations
- In-store purchases
- Cash purchases
And, unfortunately, identifying the debit in your bank account isn’t enough of a record to ensure that your purchase qualifies for a small-business tax deduction. You’ll need a copy of your actual receipt to document the amount, date, and item details of the expense.
Unfortunately, paper receipts are easy to lose and damage, so you need to store them carefully. Keep track of physical copies of purchase records by:
1. Scanning Receipts
Scanning or taking pictures of receipts is the safest way to keep a record of them. It’s much harder to lose or spill coffee on a digital record of a purchase than a physical one. This way, if you misplace a receipt or accidentally put it through the washer, you have a backup.
Scan or take a picture of a receipt as soon as you receive it to reduce the chances of it being lost or damaged.
You don’t even need a paid app to scan receipts, because there are a variety of options for both Apple and Android devices that allow you to scan and save documents for free.
2. Using an Envelope or Folder
Another option is to store receipts in a designated envelope or file folder in your office or filing cabinet. It’s best to store receipts by tax year so you know which ones will apply to your current return.
The hardest part of using this method is that you’ll need to make a habit of taking paper receipts from your pocket, wallet, or purse and putting them in the proper place. If you lose them, you won’t be able to claim them as write-offs.
4 Tips for Small-Business Expense Tracking
Regardless of how you track your small-business expenses, there are ways you can optimize the process to make it simpler and more straightforward.
1. Keep Business and Personal Purchases Separate
Even if you don’t have a business bank account, you can still keep business and personal expenses separate.
For example, let’s say you go to Costco and purchase groceries for your family and office supplies for your business at the same time. Instead of making one large purchase, separate your items into two transactions — one for your household items and another for your business purchases.
This makes it much easier to calculate the total amount of your write-off, including taxes, fees, or discounts, instead of having to try to extract the information from a larger bill.
2. Ask for Receipts
When tracking expenses for business purposes, you need to make a habit of asking for (and keeping) receipts. This goes for any retailer that doesn’t provide digital receipts, like gas stations and restaurants.
As a small-business owner, you need to get used to asking for receipts and keeping them safe until you have a chance to scan or store them safely.
Any receipt you don’t ask for is an expense that you can’t claim when you file your taxes.
Even if you aren’t sure whether a purchase will qualify as a deductible business expense, it’s better to ask for a receipt and talk to your bookkeeper or accountant afterward rather than miss out on a potential deduction altogether.
3. Get Digital Receipts
Many retailers offer both digital and physical receipts. Whenever possible, opt for a digital receipt. They’re easier to document, track, and store than paper receipts.
Because stores send digital receipts to an email address, use a designated email address for business purchases. This will keep your personal inbox clean and your business expenses in one place.
4. Organize Your Expense Records
Keep your tax deduction records organized by year, category, and item to make filing your tax return simple and stress-free. If you keep receipts organized as you make purchases, it will be much easier to sort through and calculate them later on.
And, if you use an accountant to file your taxes, they’ll appreciate a straightforward and clean expense report to reference.
Tax deductions are crucial for small-business owners. But you won’t qualify for write-offs if your business purchases aren’t sufficiently recorded and documented. Tracking your expenses using accounting software, business bank accounts, or manually will help you to prove purchases, stay on top of costs, and keep your records organized.
Keep copies of both paper and digital receipts to make your next tax return more affordable and easier to file.