As a small business owner, one of the easiest and effective ways to save money is by writing off your business expenses.
But what does this mean exactly?
A write off is a business expense used to reduce your taxable income.
In this blog, we will go over the basics of expenses for small businesses and how tracking expenses can help you save money on your taxes.
How Business Expenses Reduce your Taxable Income
In a nutshell, this is how it works.
The government, IRS*, requires all businesses to pay taxes at the end of the year. Your tax rate that you will pay will vary depending on your business structure. However, that tax rate will always apply to your total taxable income, i.e. the final total after you subtract business income from your business expenses.
This means that if you made $100,000 in income but spent $70,000 in business expenses, you will only pay taxes on the remaining $30,000. Organizing your expenses into the appropriate business categories can help reduce your tax bill and keep more money in your pocket.
*CRA, if you operate in Canada
How to Write off a Business Expense
To write off a business expense, you need to follow these steps:
Record the expense: Make sure to keep accurate records of all your business expenses, including receipts, invoices, and any other documentation that supports the expense.
Categorize the expense: Categorize the expense as a business expense, and make sure it falls under the IRS’ definition of a deductible business expense.
Determine the deduction amount: Calculate the amount of the expense that is deductible. For example, if you had a business meal that cost $100, but only $50 of it was for business purposes, you can only deduct $50.
Report the deduction on your tax return: Business expenses can be deducted on your tax return as a business expense.
Keep documentation: It’s important to keep accurate records and documentation of your business expenses in case you are audited by the IRS. This includes any receipts or invoices you may have.
It’s always a good idea to consult with a tax professional or refer to the IRS guidelines to make sure you are taking advantage of all the tax deductions you are eligible for and to ensure you are following all the rules and regulations.
Expenses that Qualify for Write-Offs
The IRS allows you to deduct a variety of expenses as long as they are ordinary and necessary for your business. Some of the most common expense categories that qualify for deductions include:
- Office rent and lease
- Office supplies and equipment
- Advertising and marketing expenses
- Meals and entertainment
- Shipping and postage
- Professional dues, memberships, licenses, subscriptions
- Professional fees (such as accounting or legal fees)
Pro Tip: For a full list of tax deductions for your business speak to your local tax authorities or accountant.
Why Tracking Expenses is Important
In order to take advantage of tax deductions and effectively pay less in taxes, you must be able to prove to the IRS that you actually incurred the expenses as part of your business operations. This is where tracking expenses becomes critical. By keeping accurate records of all your expenses, you can easily provide the IRS with the information they need to verify your deductions.
Tracking Expenses using TrulySmall Expenses
As we mentioned above, tracking expenses is an important part of running your business. But, we understand that it can be time-consuming and sometimes you just lose receipts.
With TrulySmall Expenses, you’ll be able to start automating your budgeting and expense tracking with ease. Here’s what you can do:
Automate your transaction entries: Tired of all keeping all those receipts? With the help of OCR technology, we’ll enter all of your receipt data automatically. Just snap a photo of your receipt and we’ll scan, read, and record it as an expense transaction. Now, all your receipts will be stored digitally.
Keep things separate: If you’re just starting out, there’s no need to start your own business bank account. Simply, categorize whether or not each expense was business or personal and we’ll keep them separate and organized for you.
Bank Connect: When you safely and securely connect your bank account to TrulySmall Expenses, you’ll get a list of transactions automatically organized into the appropriate business expense category, all in real-time.
Budget Tracking: Easily, create a budget for each business expense category and we’ll keep an eye on your spending. Our dashboard will provide insights on your spending habits and let you know if you’re getting close!
Wrapping it up
In conclusion, tracking expenses is an essential part of managing a small business and can help you save money on taxes. By keeping accurate records of all your expenses, you can take advantage of all the deductions available to you, avoid overpaying your taxes and save money in your business.