5 Tips to Help You Stay on Top of Your Business Tax Deductions
5 Tips to Help You Stay on Top of Your Business Tax Deductions
With spring in the air and last year's taxes well in the books, now's the time to start planning to make next year's tax season more efficient, painless, and—dare I say it—fun. Okay, well maybe not fun, fun, but you know what I mean.
As a small business owner, taking every tax deduction your business is entitled to is super important so you keep as much of what you've earned as possible and don't overpay on your taxes unnecessarily.
Knowing which business expenses are tax deductible—and which are not, made so by the Tax Cuts and Jobs Act—is key. The rest is like a jigsaw puzzle. You add in each piece throughout the year to create a picture of your business's finances. Just remember, each piece of the puzzle you create must have some sort of proof of that transaction for the IRS to consider it a legitimate deduction.
Here are five tips to help you keep track of your deductible expenses.
1. Save invoices, receipts and other documentation.
Anytime you "out-go" (spend) money, you must "in-come" (ask for or receive) a receipt of some sort. It doesn't matter the form of the receipt, it can be printed or electronic. The hardest part of keeping track of your receipts is figuring out a way to find, store and organize them. You might get emailed receipts and invoices from vendors and suppliers and can quickly lose track of what you've received. Rather than waiting for the pressure of tax time with its deadlines, make it a regular (and mundane) routine to organize them (daily, nightly or weekly).
In addition to invoices and receipts, you might need other documentation that is required by the IRS to validate your expense. For example, if you plan to claim the home-office deduction, you may need statements or bills for your utilities, property taxes, home security system, insurance, etc., to prove your allowable deductions. As a backup for any receipt you might have lost, or expense for which you have no receipt, keep your credit card statements and canceled checks handy. Anytime you are under audit, these are the documents that you'll need to produce to prove the validity of the deductions you're claiming.
2. Log deductions for travel and client acquisition.
For the kinds of deductions you take that don't have receipts or invoices, you will want to create your own documentation—in the form of a detailed log. For travel expenses, include the dates, location, and business purpose of each trip. If you are claiming standard business mileage—rather than actual vehicle expenses—you will need to record the number of miles you traveled as well.
Since the passage of the Tax Cuts and Jobs Act, you may generally no longer deduct entertainment expenses (some limited exceptions apply), such as tickets to sporting events or the theater, club dues or gifts. You can still deduct 50% of meals when you are meeting a client to talk about business, provided it's not lavish or extravagant. It's important, though, to keep a record of such meals, including the date, time, place, name of the client, and the business matter you discussed.
3. Use a bookkeeping ledger or accounting software.
Generally, self-employed individuals and small businesses owners use the cash accounting method rather than the accrual accounting method when doing their bookkeeping. With the cash accounting method, you record expenses when you make a payment and income when you receive it.
To record your expenditures and receipts, it's wise to use some sort of bookkeeping ledger or electronic accounting software program. Having such a process will make it easier for you to categorize your deductions come tax time.
Your bookkeeping ledger could be as simple as a spreadsheet if you have relatively few entries. If you have a lot of income and/or expenses, you should strongly consider an accounting software program (e.g., QuickBooks Online or Desktop, Xero, or ClientBooks). With a desktop or cloud-based accounting system, you have an easy way to track and manage your books. Plus, if you're typically out in the field, an online system allows you to access your books whenever and wherever you are.
4. Maintain a separate business bank account.
If you haven't already, you should consider opening a bank account dedicated solely to your business. Having a separate business bank account allows you to more easily segregate your business income and expenses from your personal income and expenses. Writing checks from a business bank account also makes your business appear legit.
In addition, you should also consider getting (if you don't already have one) a dedicated business credit card that you use only for business expenses. From the bookkeeping standpoint, it makes it a lot easier to categorize and track your expenses. If you pay by check, separate your purchases so you have only business expenses on one receipt. Keeping expenses separate makes organizing receipts all the more painless in the long run and provides much cleaner documentation should you need it.
5. Work with a bookkeeper or tax accountant.
If you're not a fan of organizing paperwork and keeping detailed records, there's still hope for you. You can hire a bookkeeper to either take care of your books for you or guide you on how to better handle your own business books. The work that is done throughout the year will be key in determining how difficult or easy your taxes are—plus, the bookkeeper can make sure you're able to maximize your business deductions.
Working with a tax accountant is a must for most small businesses. The assistance of a knowledgeable professional can save you both time and money.
Fortunately, there are a lot of options to choose from for both—from one-on-one individuals to professional firms that offer bookkeeping and tax accounting services. If you're comfortable working electronically, you have a choice of software or cloud-based platforms that are available 24/7. These services often can provide the best of both worlds because they combine the personalization of a friendly expert with the benefits of innovative technology.
Have questions for a tax adviser? LegalZoom provides access to tax professionals through a prepaid advisory plan. You get advice on an unlimited number of new tax matters, along with many other benefits, for a low monthly fee. You also can sign up for a free tax consultation with 1-800Accountant directly.