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The primary objective of every business, large and small, is to generate a healthy ongoing net income. Of course, revenues minus expenses and minus taxes equals net income or profit. A business can generate more profit by increasing revenue, managing or reducing expenses, and optimizing tax deductions.

These are our recommended best (and worst!) practices for recording and deducting business expenses: 

What Are Expenses? 

Expenses are the costs that a company incurs in the process of generating revenue. Importantly, businesses can take properly recorded tax deductions on their income tax returns, provided that the deductions meet IRS guidelines.

Deductions fall in three areas: operating expenses, non-operating expenses, and capital expenses.

Operating expenses are those costs directly related to a company’s main activities. These include the cost of goods sold, salaries, administrative costs, utilities, rent, mortgages, and insurance.

Non-operating expenses are those costs not directly related to a company’s operations such as interest and the costs related to borrowing money.

Both operating and non-operating expenses can be written off during the year they are incurred. Capital expenses must be capitalized or written off according to a timed schedule. 

Why It’s Important to Track and Record Business Expenses 

Because managing and properly recording business expenses has such an important impact on tax deductions and company profits, an important principle is this: “as you properly record and measure expenses, you can improve and leverage them.”

Properly recording expenses helps business owners and executives become more financially aware and more able to achieve better money management. That includes keeping accurate track of cash flow and more effectively determining how profitable a business is to better determine how and when to use funds.

Good record-keeping practices help keep employees honest and happy. They also help identify cost outliers and cost savings. Good practices help take advantage of tax deductions and lead to better preparation for tax season. 

Best Practices for Recording and Deducting Business Expenses 

To effectively track and record business expenses to get appropriate tax deductions, use these tips: 

  1. Open dedicated business checking and savings accounts. Always keep personal and business expenses totally separate. Building strong banking relationships is important for ongoing business success. 
  2. Get a dedicated business credit card. Use this card only for business expenses. Having a business credit card helps businesses negotiate better agreements with suppliers as well as protecting a business against identity theft. 
  3. Get satisfactory detailed documentation for all business expenses. That includes receipts for all purchases or copies of paid invoices. If necessary, label or make notations on receipts. Digitizing receipts with a receipt scanner can also be helpful. 
  4. Keep a mileage log and detailed records of all business travel. 
  5. Keep all expense records for a particular year organized and together. Review and categorize expenses regularly.  
  6. Keep all records for the IRS-required length of time. 
  7. Use technology to automate record-keeping. 
  8. Get professional accounting assistance with records and tax deductions. 

Worst Practices for Handling Expenses 

The worst practices include failing to save receipts and expense documentation, not tracking all business expenses, not treating bookkeeping tasks seriously, having disorganized record-keeping practices, making errors in paying employees, being disorganized when dealing with your accountant, failing to reconcile books with financial statements, and paying taxes late. 

Get Expert Accounting Assistance That You Can Rely On 

Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success. Get the tax deductions you deserve.