Avoid These Expense-Tracking Pitfalls This Tax Season
Paying taxes are an inevitable part of running your business, and no business owner wants to pay more than necessary to the IRS in taxes at the end of a busy year. As a business owner, you may be well aware that the Internal Revenue Service permits you to write-off or deduct a wide range of expenses that your business pays for each year but that you will need to be able to provide proof of your expenses in the event that you are audited.
There are benefits to you to track your expenses and to mine for deductions that could ultimately save you a small fortune on your tax bill when the tax payment deadline rolls around, and you can streamline your expense tracking efforts by following a few simple tips.
Complete Your Mileage Log As You Go
It can be difficult to get into the habit of tracking your business miles traveled, but the fact is that the mileage deduction may be a large deduction for many businesses. Completing a mileage log is actually rather simple, but some people fail to do so out of forgetfulness or general neglect. You first will need to invest in a mileage log book if you do not already have one. Then, keep your mileage log book in a place in your vehicle where you will inevitably see it when you turn your vehicle on and off.
For example, you may have a small storage nook next to your gear shift. When you place your mileage log book in a visible location, you will more easily remember to complete the required entries. Remember to include data about the date, the number of miles traveled and the reason for the trip. This will make it easy for you to tally about your mileage deduction and less tedious if you do get audited.
Keep Your Business Receipts
If you are like most business owners, you may easily rack up business-related purchases for everything from meals with clients to postage and extra envelopes. In fact, you may make numerous business-related purchases each week. By the end of the year, you inevitably will have a stack of receipts to sort through. While it can seem onerous to sort through the receipts, it can be detrimental to not have the receipts at all. Without the receipts, you generally may not be able to write-off expenses.
There are some exceptions to this. For example, some transactions that have a dollar amount under $75 are not required to be tracked. There are exceptions to this, so it is best to err on the side of caution and to retain all business receipts. You may also take the extra step and sort through those receipts by creating a filing system. By sorting them as you go, you will decrease your burden when you prepare your taxes.
Write the Business Purpose for All Expenses
Each expense that you deduct for business purposes should actually have a related business purpose tied to it. Some expenses may seem rather obvious. For example, if you purchased toner at a toner supply store, obviously this is toner for a business printer. However, if you are deducting a meal at a local restaurant, you may need to write the name of the business client who you ate lunch with.
Each deductible expense must be documented as a business expense, or it will not be eligible. If you simply take a minute to write the business purpose on the receipt as you make a purchase, you will not need to spend the time to backtrack later when you are preparing your tax returns. This can also hedge off issues with fuzzy memories that may result in your inability to count the deduction in your favor.
Complete a Periodic Audit of Your Deductions and Records
Even a small business or an independent consultant can make several business-related purchases over the course of a week. Because of this, you can easily lose track of your expenses, misplace receipts and otherwise forget about deductions that may be used to offset your tax liability at the end of the year. A great habit to get into is to complete a periodic audit of your deductions and records so that you can update your records while your expenses and purchases are still at the front of your mind.
Depending how large and busy your company is as well as how great your memory is, this may be beneficial to complete every few days, every week or at the end of the tax year. In fact, this step may only take a few minutes of your time, but it may help you to save hundreds or even thousands of dollars in some cases on your taxes.
Whether you have a smaller business or a larger company, you certainly want to make every effort to lower your tax liability. While the IRS does allow you to deduct many expenses, the fact is that you can only legally deduct expenses if you can prove that they are for business-related purposes.
Tracking and storing this documentation can be burdensome and time-consuming, and many business owners often leave some deductions unclaimed simply because of poor tracking and receipt management efforts. When you follow some of these tips on a regular basis, you may be able to maximize your deductions while also decreasing your tax liability each year.
On the topic of documentation, consider simplifying your tax filings this season. When you’ve got to file 1099 online – or W-2 forms – for several employees and contractors, it can become time-consuming. A simple solution is to find an e-file service that handles your e-filing, the printing and the delivery as well. Visit www.eFile4Biz.com to see what the industry expects from a provider where you can safely efile 1099 forms. You can also view their explainer video below for more information.
Good luck this tax season!