Making expense deductibles a piece of cake

April 4, 2011

Contributed by FreshBooks customer Mariette Knoblauch. For a Canadian perspective, please read ThatBookKeeper’s post on FreshBooks and Taxes.

As you’re getting ready to file taxes this April, you’re probably running into a few frustrations, especially around deductibles and write-offs. One easy way to avoid this is to use expense categories in FreshBooks, so you can fill in forms in minutes.

Expense categories in FreshBooks can be added at the click of a button, and tax time will be a breeze if you set them up to match the categories that you use on Schedule C (the tax form for U.S. sole proprietors).

First, look at your Schedule C from last year. What expenses did you have? There are the standard listed expenses, some of which are commonly used by most people (Advertising, Office Expense, Supplies) and some that no one has ever used (Depletion?).

A few of these categories merit special treatment in your FreshBooks setup. Contract labor is the category for people who provide services to your business.  You can use FreshBooks Time Tracking for your contractors and have a complete record of all your contract labor expenses for the year. When you hire a contractor for your project in the US, send them a form W-9. The website provides a fillable pdf form that you can email to your contractors. This gives you all the information you need to do the required 1099-MISC for them at the end of the year.

Mileage may seem like a small amount at 51 cents a mile (for 2011), but it can add up to big savings. How many miles a week do you drive for business purposes like meeting with clients and vendors, going to professional networking and educational events, picking up supplies, and delivering finished projects? If you drive an average of 50 miles a week, over the year that’s 2,600 miles, which would be a $1,326 deduction – not too bad!  The IRS does require that you keep contemporaneous records of where you went and why it was business related. You can make an expense category for Mileage in FreshBooks, and record all the necessary information in the notes section. You can even get the MiniBooks iPhone app and record your business trips on your phone as you go!

Keep your business meal expenses separate using the Meals & Entertainment category.  Unlike other business expenses, you can only deduct half of what you pay for meals, even while travelling. After all, you’d have to eat anyway, no matter what you were doing. As with mileage, you can use the notes field to record who you were with and the business purpose for the meal.

There are all kinds of deductible expenses besides the standard ones, and you can make as many custom categories as you like. In your List of Categories on the Expenses Tab, just click “New Category”. Each business will have its own individual expense categories.  You can deduct any expenses that are “ordinary and necessary” for your type of business, and that will be different for every business. A cat-sitter can deduct feather dangly toys and kitty treats.. A cupcake business could have sprinkles and cute pink boxes.  An exotic dancer has even successfully deducted her extra-large implants (after a tax court case – the IRS was not initially sympathetic).  Every day people are inventing new types of businesses, and they will have unique expenses, so don’t feel you have to be limited to the standard categories.

With all your expenses sorted into their tax categories in FreshBooks, and your income from your invoices already there, the Profit and Loss report will have much of what you need for doing your US Schedule C at the end of the year. You may have other items such as home office that will have to be added, but most of the information you need will be there in a convenient format to make doing your taxes quicker and easier.

about the author

This is a guest post for the FreshBooks blog. FreshBooks is the #1 accounting software in the cloud designed to make billing painless for small businesses and their teams. Today, over 10 million small businesses use FreshBooks to effortlessly send professional looking invoices, organize expenses and track their billable time.