Audit-Proof Your Small Business
Eight tips for keeping your business expenses and record-keeping organized.
When you’re running a business, you have a lot to manage. If there isn’t a person in your face forcing you to stay on top of a task, it can be easy to keep putting it off to tomorrow, Friday or next week … and soon you have a large pile to work through.
While this strategy works for many projects, it can lead to trouble in the financial realm. If you’re audited, you’ll need a track record for each transaction or face consequences. Your business expenses are not something you can make up or give your best-educated guess. They need to be accurate, and you need to have the evidence to back them up.
The best and least stressful way to keep your business expenses accurate is to maintain what the IRS calls a contemporaneous approach. It’s basically an organized approach for tracking your expenses as they occur. Here are eight tips to help you manage your business expenses and finances and ensure you are prepared in case of an audit.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Pick a strategy that works for you
You can outsource your finances by hiring a bookkeeper or a “QuickBooks expert.” The more cost-effective but time-intensive route is to track your expenses yourself, either by hand or electronically.
2. Know what to track
You’ll want to track the following items. Ensure you’ve got a strategy for each.
- Cash flow
- Expenses
- Donations/charitable giving
3. Store your business expenses information in one place
Law requires you to keep all tax records for at least three years. This can either be a digital copy in the cloud or a physical copy. You might also store your expenses within your subscription service app.
4. Keep your business and personal accounts separate
Having a separate bank account for your small business will help you not mix up your personal expenses with your business expenses. Having a credit card connected to the business account will also enable you to easily send business expenses through that account.
5. Use technology and apps to help streamline the process
Traditionally, professionals would keep all business receipts in a manilla envelope. Nowadays, there are many electronic, paperless options that sync to your accounts or allow you to upload photos of receipts. Pick a platform you’re comfortable with that isn’t cost-prohibitive.
- Microsoft Excel has many templates available for tracking cash flow, income, etc. It is a great option for small businesses without too many transactions.
- QuickBooks is a widely used platform functioning as a subscription service that larger organizations and companies use for tracking business expenses.
- Other subscriptions to consider include Expensify, Certify, and Zoho Expense (a lower-cost option).
Additionally, you may utilize apps to assist in tracking a particular category of expenses. Google Maps can assist in re-creating and tallying your business mileage. MileIQ is a great app for accurately tracking your mileage by tracking your movement for business trips, and it can generate a report at the end of the year.
6. Understand what qualifies as a deductible
This is one of the key areas that trigger disputes, so it’s critical to understand what does and does not qualify. According to the IRS, business deductions should be “both ordinary and necessary.” In other words, it’s an expense that is common for businesses within your industry and is needed for running the business. This largely includes office expenses such as printer paper, monitors, computers, pens, etc.
If you’re unsure whether an expense qualifies as a deductible, track it. Later, your tax adviser can guide you in determining whether to include that expense.
7. Remember: Only your business can make business deductions
If employees are incurring expenses on behalf of your business, their option is to discuss reimbursement with you. Employees are not able to make business deductions on their personal taxes. This rule changed within the past few years, so some people may find the consequences confusing.
For example, people can only cclaim the home office tax deduction if they are self-employed. Otherwise, employees should discuss reimbursement with their employers.
8. Understand how to track donations
Your charitable donations are not a deductible business expense if you are a sole proprietor reporting your business income on a Schedule C, but potentially they could be an itemized deduction on your personal return. If a donation is completed in exchange for a sponsorship, it can be categorized as advertising or marketing rather than charity.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Andy Gillund, CPA, MBT, is a primary tax adviser and CPA for Berger Financial Group. He has over a decade of experience in accounting and helping clients minimize their tax burden. Andy has a B.S. in Accountancy and received his Master of Business Taxation degree from the University of Minnesota Carlson School of Management. He is active with the Minnesota Society of CPAs and the Volunteer Income Tax Assistance (VITA) program.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published