Keep an eye out for the following mistakes as you take control of your business’s accounting needs.
Tax time has recently come to a close, but April 15th isn’t the only day of the year that you should be concerned with your business expenses.
Not only will being diligent about tracking and managing expenses throughout the year prevent the hassle that comes from rushing to meet tax filing deadlines, it’ll also ensure that you’re able to claim every possible deduction for which you’re eligible.
That said, the world of business expenses can be murky and difficult to navigate. Keep an eye out for the following mistakes as you take control of your business’s accounting needs:
Mistake #1 – Not Being Familiar with All Possible Expenses
If you’re new to freelancing, one of the easiest mistakes to make when it comes to business expenses is to simply be unaware that something qualifies as a legitimate expense in the first place.
For instance, did you know that the hosting fees associated with running your website can be expensed on your tax returns? How about the antivirus program on your business computer? Freelancers are eligible to take advantage of hundreds of different deductible expenses. Our small business tax series can help you identify many of these opportunities, as can a qualified tax attorney or CPA.
Mistake #2 – Claiming Expenses that Aren’t Deductible
That said, not all business expenses are deductible from annual tax returns. According to the IRS, anything you choose to expense must be both “ordinary and necessary” for the operation of your business. While that means different things in different contexts (for example, pet food could be deductible for a dog breeder, but not a freelance designer with a pet), it’s important to run each potential expense you intend to claim through this filter before submitting your returns to prevent future tax penalties.
Mistake #3 – Not Having a Good System for Expense Tracking
Now, let’s be clear about one thing… Recording expenses is important, but so is the manner in which you record them. Just because you’re operating solo as a freelancer and don’t have the benefit of an entire accounting department backing you up doesn’t mean that you can get away with haphazardly tracking expenses in different locations, using different reporting structures.
If your expense documentation consists of a fistful of receipts and a few numbers scrawled on the back of an envelope, it’s time to put a better system into place. Freshbooks can help you organize expenses with ease by automatically importing expenses from your bank account or snapping photos of your receipts to add to your invoices.
Mistake #4 – Not Recording Cash Expenses
If you use Freshbooks, you should be able to import expenses from your business bank accounts, credit cards and online payment accounts (think Paypal or Square). And while this functionality can help you track most of your expenses automatically, you can’t rely on any one system alone to manage your accounting needs for you.
Take, for example, your cash expenses. 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 for or what expense category it should be assigned to.
If you make payments in cash, make it a priority to record how much you’ve spent and where that money has gone.
Mistake #5 – Not Tracking Expenses Immediately
Raise your hand if this sounds familiar… You’ve got five different errands to run – one of which is stopping to pick up some more printer paper for your home office. You promise yourself that you’ll record the expense later, but weeks go by until you eventually forget and accidentally throw out your receipt with the trash.
The solution to this mistake is to record your expenses as they occur. Don’t assume you’ll remember to come back later – track your purchases as soon as you can. Again, Freshbooks makes this easy with helpful iOS and Android apps that help you capture expenses on-the-go.
Mistake #6 – Not Keeping Your Receipts
Don’t throw out your receipts. If there’s even a chance you could be audited – and as a freelancer, there always is – you should keep any receipts you receive at least three years (or longer if the asset in question is still in service after this period). If you purchase items online that don’t come with a paper receipt, store a downloadable version to your computer – or take a photo of your receipt using Freshbooks – should you need to reference it in the future.
As a note, though, remember that it’s wise to keep paper copies of any electronic receipts you report. Though the IRS has allowed electronic receipts since 1997, they must meet certain criteria to be eligible. It’s always better to be safe than sorry in the event of an audit.
Mistake #7 – Not Tracking Mileage to Customer Visits
On the subject of not knowing what kinds of expenses you’re eligible to claim on your business taxes, consider that one of the most commonly-missed deductions is mileage accrued traveling to and from customer visits.
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. Use an app like MileIQ or TripLog to be sure you’re tracking every eligible mile.
Mistake #8 – Not Recording Business Purpose for Expensed Meals and Drinks
Let’s face it – meal and drink deductions are lots of fun. The government is, essentially, helping you to cover the costs of meeting people and enjoying a nice meal, all while expanding your business at the same time.
That said, in nearly all cases, these expenses are only deductible at 50% of the total cost, and you must be able to provide documentation supporting the business purpose of every meal or drink you expense. To protect yourself, take a few minutes after every outing and record who you met with, what was discussed and how you expect the get-together will help grow your business.
Mistake #9 – Not Expensing Shared Utilities
Another common missed expense? The shared utilities associated with powering your home office. Think about it… A portion of what you pay for gas, electric, water, cleaning supplies, phone service, internet service and more for your overall household are commandeered into service for your home office – and that makes them eligible to expense.
While you’ll need to reduce the total bills based on the area your home office represents out of your home as a whole, these expenses can add up to quite a bit of money when it’s time to file your year-end taxes.
Mistake #10 – Not Getting Help
Business expenses can be complicated, and unless you’re a freelance accountant, chances are your areas of expertise lie elsewhere.
So if you find yourself feeling overwhelmed by the scope and process of reporting expenses, consider seeking out the support of an accountant or bookkeeper.Though there is a cost associated with doing so, you’ll likely find that the time you save and the additional expenses you’re able to claim – thanks to some expert advice – make it worth the investment.
Have you ever made any of these business expense mistakes? Share about your experiences by leaving a comment below.