Understanding business spending, specifically business expenses, can help the business owner monitor and predict costs looming in the near future. Business expenses should be tracked through your financial accounting system and reviewed monthly as part of your income statement. Creating the habit of tracking your expenses makes for a clear understanding of your business spending, creates accurate tax-ready financials, and is critical in understanding your business cash flow.
What do I need to write off business expenses? Who better to ask than the IRS, What Can I Deduct?
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
The IRS clearly states in great detail which business expenses are deductible. Small business expenses tracking can be different than their larger counterparts. Interestingly enough, many small business owners are unaware of the expenses that can be deducted. Here is a shortlist of the most common small business tax/expenses deductions:
The IRS lists the following additional types of business expenses:
This list is not all-inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses.
It is very simple: you need to be diligent and detailed. Itemization and good record keeping are the only way to ensure you will not have any IRS issues. You will want to keep copies of bills from vendors as support for your business deductions. Also, your financial accounting system will provide you with the ability to keep track of your expense deductions so you can review your spending.
Setting up a system to keep track of your expense deductions is easier today than ever before. If you use an electronic bill payment system, it will do everything from receiving bills to paying them. It will provide a digital cabinet for storing copies of invoices. These systems are becoming popular for small businesses as they ensure proper controls are put in place while creating a simple, easy to use system for processing bill payments. If you are using a manual system, you will need to set up a process that ensures that all bills are appropriately reviewed, entered into your accounting system, paid, and filed.
Accurate and up to date recording of expenses deliver the most accurate picture of your business’s health. Understanding expenses and costs and tracking them in your accounting program, such as an online bookkeeping service, ensures you view a real-time picture of your cash-flow and expenses.
Resources: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses#what, https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-deduction