These business expense mistakes may be common, but they are easily avoidable.
Business expenses are an ordinary and necessary cost of running a business. Unfortunately, many freelancers make common business expense mistakes like not knowing what’s tax-deductible, forgetting to keep receipts or failing to have a robust expense tracking system.
As a result, they don’t really know how they’re spending their money, often aren’t prepared for the tax season and even forget to charge clients for billable expenses.
If this sounds familiar, or you’re just genuinely curious about the types of business expense mistakes freelancers make, then you’re in the right place. Here are nine of the most common business expense mistakes and how to avoid making them.
1. Not Knowing What Expenses Are Tax-Deductible
Some freelancers don’t know what tax deductibles or tax write-offs are, or that they’re even eligible for them. Others have a vague understanding but aren’t sure what expenses are deductible.
The IRS rules are constantly changing, which only adds to the confusion. An act was passed only recently, for example, which eliminates entertainment as a deductible.
As a result of all of this, freelancers often run into trouble come tax time and end up overpaying on their taxes.
If you’re struggling with tax deductibles and want to wrap your head around them once and for all, read our complete guide to small business tax write-offs. In it, you’ll learn that:
- Write-offs reduce your total taxable income
- They’re not the same as tax credits
- There are 17 common small business tax write-offs
2. Failing to Use a Robust Expense Tracking System
The way you record expenses is just as important as actually recording them in the first place. If you track expenses using Excel spreadsheets and keep a shoebox of receipts, you’re probably:
- Missing out on certain tax write-offs that reduce your taxable income
- Wasting time inputting and updating data
- Haphazardly cross-referencing and wading through bank statements
- Feeling stressed come tax time as receipts and bank statements are everywhere
Cloud accounting software helps you avoid the headaches of manual expenses tracking. The right software will:
- Prepare you for the tax season by giving you quick access to a detailed record of all your expenses and tax-friendly expense categories
- Connect to your bank account and update with your most recent spending without you lifting a finger
- Let you take a photo of a receipt with your mobile and upload it to the cloud for safekeeping
3. Being Completely Hands-Off with Expense Tracking
Even though cloud accounting software can track most of your expenses automatically, don’t make the mistake of being completely hands-off.
No matter how good the software is, it still requires your input. Nowhere is this more apparent than with cash withdrawals. For example, if you withdraw $100 from your business bank account, that transaction should be recorded in your accounting program. But without your assistance and further documentation, you won’t know what the purchase was for or what expense category it should be assigned to.
4. Not Keeping Receipts
Making the business expense mistake of not keeping receipts can lead to you forgetting to claim certain cash expenses as deductible when filing your tax returns. It can also put you in a precarious position if you’re ever audited. The IRS requires that you keep any receipts you receive for at least three years (or longer if the asset in question is still in service after this period).
So make sure you keep all receipts in a safe place. If this safe place is a filing cabinet, a shoebox, your computer or a combination of places, consider also securing them in the cloud.
For example, expense tracking software lets you take a photo of any receipt and store it in the cloud. It can also help you organize all your receipts in one central location, so you’re prepared when it’s time to file your return. You also don’t have to worry about losing them.
5. Not Charging Clients for Reimbursable Expenses
Many freelancers don’t know what reimbursable expenses are, aren’t always aware of what’s reimbursable or forget to charge clients for them.
As a result, they often pay out of pocket. If this sounds like you, then it’s time to come to grips with these pesky expenses.
Reimbursable expenses, also known as billable expenses, are expenses that you incur on your clients’ behalf when delivering work. These are expenses that should, in theory, be reimbursed by your client.
To learn more about billable expenses, read our comprehensive guide to reimbursable expenses. In it, you’ll learn:
- What reimbursable expenses are (examples included)
- How to record billable expenses
- How to bill clients for them
- The best practices for collecting them without burning bridges with your client
6. Not Tracking Mileage to Customer Visits
One of the most commonly missed deductions is mileage accrued when traveling to and from customers. When most freelancers think of mileage deductions, they envision conference travel or miles driven for sales presentations.
But after you’ve closed the deal, every single trip you make to the customers’ office represents potential mileage you can claim against your income.
To make this easy for you, FreshBooks just added a new Mileage Tracker to the iOS app. Now, you can automatically track your mileage as you drive, easily categorize trips as business-related, and see your potential tax deduction
You can also use other apps like Everlance or Hurdlr to track those eligible miles. Both integrate with cloud accounting software like FreshBooks to maximize your mileage deduction and improve workflow by automatically capturing miles you can see directly within FreshBooks.
7. Not Maintaining Proper Records of Expensed Business Meals
A business meal is a common tax write-off subject to a deductible amount of 50%. Even though you may qualify for this write-off by meeting the IRS’s criteria (an expense must be necessary, it cannot be lavish and you must be present at the meal), not keeping proper documentation can result in you not obtaining this deduction.
So make sure you keep accurate documentation that supports the business purpose of every meal. This means recording:
- The expense amount
- Date and place of your meal
- Who you met with
- What you discussed
- The general nature of the expense
- How you expect the meeting to grow your business
Maintaining records of receipts and noting down the important information on them is often enough. But just make sure you also keep a digital copy of your receipt in the cloud because the ink on paper receipts fades over time, making them illegible.
8. Not Expensing Shared Utilities
Shared utilities are another commonly missed business expense associated with powering your home office.
Think about it: A portion of what you pay for gas, electricity, water, cleaning supplies, phone service and internet helps you run your home office. That makes them an eligible business expense.
You’ll need to reduce the total bills based on the area of your home office compared to your home overall, but these expenses can add up to quite a bit of money when it’s time to file your year-end taxes. So be sure to track them.
9. Not Getting Help
Business expenses can be complicated, and unless you’re a freelance accountant, chances are your areas of expertise lie elsewhere.
Although there’s a cost involved in using an expert’s services, you’ll probably find that the time saved and extra expenses claimed as a result of their advice is well worth the investment.
Not sure whether you need an accountant or bookkeeper? Then read our guide to bookkeeping vs. accounting to learn the difference and help you decide.
The Bottom Line on Business Expense Mistakes
Business expenses may be part of running a business, but common business expense mistakes don’t have to be.
Now that you know what they are, you can avoid making them and hopefully become more aware of your spending, and be better prepared come tax season.
You can also rest easy knowing that should you accidentally make any one of these mistakes in the future—you’re only human after all—you now know how to fix them.
This post was updated in February 2020.