Many of our clients use QuickBooks and other expense-tracking software for tracking their business expenses. While this kind of software is a useful tool for business owners, it is only truly effective when combined with a detailed and accurate paper trail of those expenses. If you’re not sure what kind of paper trail you should be keeping for your business expenses, here are some basic tips to get you started.
A lot of business owners think that their bank statements are enough of a paper trail to prove their business expenses; however, the IRS is starting to push more and more for actual receipts of business purchases. For this reason, we have begun encouraging our clients who own small businesses to keep copies of receipts for all their business expenses.
Obviously, keeping a filing cabinet full of physical receipts can be troublesome, and can even lead to receipts getting lost. Instead of keeping the physical receipt, you can scan the receipt into your computer, or even take a picture of it with your phone. Save the image to a folder on your Google drive, DropBox, or other online storage drive. You will then have a complete, accurate paper trail for your business expenses without having to deal with the actual papers themselves.
If you own a vehicle that you use for business purposes, you can use your vehicle expenses or the number of miles you drove for business purposes as an expense. Most of our clients usually elect to deduct the actual mileage, as opposed to vehicle expenses, because the total deduction will typically come out higher; for 2015, the rate is $0.575 per mile.
However, if you choose to deduct your actual mileage for your business expenses, you can’t just make an estimate of the miles you accrued for business purposes. The IRS wants to see a detailed mileage log that outlines the date the miles were accrued, the destination, the reason for the travel, the odometer readings before and after the trip, and the total miles for each trip. An example of a mileage log provided by the IRS can be found here: http://www.irs.gov/pub/irs-pdf/p463.pdf#page=27
You can create your mileage log in a Google spreadsheet or in Excel. Entering both your actual mileage and vehicle expenses can help you determine which type of deduction you’ll want to use on your taxes next year.
The records that you need to keep and the deductions that you qualify for depend heavily on your business and your individual situation. For personal tax planning and bookkeeping advice, call or stop by our offices.