Small Business Finances - How to Categorize Your Business Expenses for Taxes

In order to ensure the accuracy of your small business tax filings, it is important that small businesses learn how to catalog and report their business expenses. For most small businesses (especially those that do not have a full-time accountant on hand to manage their finances), efficiency is also important when managing and recording expenses.

Here are some tips to help you efficiently manage your business expenses so that you have an easier time reporting your expenses when tax season times around.

Develop a system to cataloging information

When it comes time to managing your records, having an efficient cataloging system can go a long way in helping you stay organized and, ultimately, efficient. Many small business owners can effectively keep track of their expenses, income, and cash flow using a basic Microsoft Excel spreadsheet. The benefit of using an Excel spreadsheet for managing financial records is that you can customize the spreadsheet to suit any possible need or preference you have. However, in order to be most effective with your spreadsheet design and use, you may want to take a course in Excel to ensure that you know how to use the software optimally.

QuickBooks is one of the most popular financial software applications - especially amongst small business owners. QuickBooks also links to many banks, making it easier for you to capture and record your banking and credit card information with just a touch of a button. QuickBooks can also be used to easily manage invoices, payments, customers, and other common financial tools that many small business owners use on a regular basis.

Old-fashioned ledgers are still effective methods of capturing information and cataloging expenses. Unlike computer software applications, the ledger system does not provide the flexibility you may want when it comes to moving information around or adjusting your records. Therefore, you may have to be comfortable performing manual calculations and staying organized with your results when you use a ledger system.

Know your tax categories

When you file your taxes, you will be required to state the amount of your expenses based on categories. For example, your office-related expenses will not be recorded in the same place as your professional fees, travel expenses, and others. Therefore, if you have never seen a business tax form before, you may want to take a look at one so that you can get a better idea of what expense categories you may want to create in your cataloging system.

Common categories used by small businesses include:

Office expenses - these include office supplies, furniture for your office, and any equipment you may buy or rent

Building expenses - these include rent, facility fees, utilities, and anything else you may pay for that is directly related to the building structure itself. If you have a home office, you'll deduct a portion of your mortgage and overall home expenses that is relative to the percentage your home office occupies in your home.

Repairs and maintenance - these are different than building expenses. Repairs and maintenance items may include installing a new light fixture, or items that you've purchased to maintain your office space.

Commissions and wages - if you have employees that you pay, be sure to keep track of all payments made to them.

Benefits - benefits are different than commissions and wages. Benefits include employee plans, retirement plans, and any pensions you may have set aside.

Professional development - this is where you keep track of any continuing education efforts, including conferences and classes related to your business.

It's important that you speak with your accountant for more information about categories that may specifically relate to your business. Just about every small business should use an accountant to ensure that taxes are filed properly.

Keep records however possible

In addition to the record-keeping system you develop either on your computer or in a ledger, it is important to keep all receipts and paperwork related to those records. These receipts and paperwork will not only augment the quality of your record-keeping to help you remember what your payments were for, but they will also be requested by an auditor in the event that your business is ever audited.

Keep paper copies of all of your invoices, receipts, bank deposit slips, cash register receipts, credit card charge clips, and anything else. It may also be helpful to you if you take notes on your records. For example, if you take a client out to a meal, that meal becomes tax-deductible. You may want to include a note on the receipt for the meal in order to jog your memory when it comes time for you to tally your receipts and expenses.

Small business owners need to be sure that their records are not only complete, but that they are as accurate as possible. Not only is accuracy important for your own finances, but if you are ever audited, you may be penalized if you cannot prove that an expense was for a business-related purpose. Therefore, it is wise to take the time now to develop your record-keeping system and habits so that you can be prepared for an easier tax season.

By the way, here is a link to the IRS business tax forms you'll need to be familiar with:

http://www.irs.gov/formspubs/index.html Take time to browse the IRS Web site to get more information that relates to your specific tax situation.