Business Expenses Basics
Running a business means spending money! You have to buy supplies, purchase a domain, buy hosting... the list goes on... Keeping a close eye on all of your expenses and outgoing money is necessary and can help you make smarter decisions and even allow you to save money when it comes time for taxes. So today we are going to talk about tracking your expenses.
So why should you track your expenses? Having a clear idea of your expenses will help you make deductions that can lower taxes, meaning more money to reinvest later! As a business owner you are required to pay taxes on all income. First subtracting your expenses from sales will give you the lowest taxable income and lowers the amount of taxes you'll have to pay. If your expenses are both 'ordinary and necessary' the IRS will find them appropriate. They might include:
- Business Interest
- Car Usage
- Home Office/Studio Space
- Employee Pay
- Business Entertainment
- PayPal and other bank fees
- Listing Fees
- Shipping and Postage
Understanding these expenses will give you a good idea of your business health, or the state of your business. You may notice that you are overspending in certain areas.
So how do you track your expenses? You'll need a paper trail to prove to the IRS you did make these expenses. This means keeping your receipts and purchases organized. It's advisable to have a dedicated business account as things can get very complicated when you mix business and personal funds. Use your business bank card or a dedicated business card for business-related purchases as well. These are the documents the IRS recommends you keep in regard to expenses:
- Account Statements and Invoices
- Canceled Checks
- Credit Card Receipts and Statements
- Cash Slips (if you have cash payments)
- Receipts for anything you are claiming to be entertainment
At minimum you should hold on to these records for three years, longer depending on how you file. The best rule, is the longer you hold on to these documents, the more protected you are. This is where Quickbooks or some digital record keeping service will come into handy.