You are a business owner, not a bookkeeper, so it’s not surprising if you aren’t an expert in financial records.
But just because you aren’t a financial expert, that doesn’t mean you don’t need to know how to keep track of your books.
As a business owner, you are required to keep accurate financial records. Failing to do so can lead to financial mismanagement, cash flow issues, errors in tax returns, over- or under-paying taxes, and fines and penalties.
Updated, accurate books are a key to a healthy business. Yet, many business owners make mistakes when it comes to their bookkeeping — particularly in expense tracking.
To help you avoid common pitfalls, we’re sharing five questions to ask yourself to make sure you are tracking your business expenses accurately.
1. Do You Have Proof of Your Expenses?
It’s not enough to simply enter an expense in your accounting software. You also need to have proof to back up the purchase.
You need to have receipts for every business expense. If you don’t have proof of an expense and you use it as a deduction, you could find yourself in a tough situation if you are audited. If you can’t prove your expenses are legitimate and business-related, the IRS can disallow them and lead to higher taxes, penalties, and potential interest charges.
To substantiate your deductions, maintain clear, dated records that connect each expense to your business activity.
Acceptable documentation includes:
- Receipts or invoices with vendor name, date, and amount
- Canceled checks or credit card statements
- Mileage logs for business travel
- Written explanations for mixed-use expenses (e.g., home office, vehicle)
- Digital records (as long as they are accurate, readable, and stored securely)
Related: 5 Serious Tax Problems Caused by Bad Bookkeeping
2. Are You Tracking All of Your Business Expenses?
As a small business owner, you want to track every expense related to your business. Legitimate business expenses can be deducted from your income, leaving you with less tax liability and a lower tax bill.
If you are missing legitimate business expenses, you could end up paying more in taxes.
Make sure you are tracking all ordinary and necessary business expenses. What is considered to be ordinary and necessary expenses may vary by business type, so talk to an experienced accountant or bookkeeper to ensure you aren’t missing any expenses.
Common deductions that business owners often miss include:
- Home office expenses: A portion of your rent, mortgage interest, utilities, and internet if you use part of your home exclusively for business.
- Mileage and vehicle use: Travel to meet clients, pick up supplies, or attend work-related events.
- Professional fees: Accounting, bookkeeping, legal, and consulting costs directly tied to your business.
- Education and training: Courses, workshops, and certifications that improve your professional skills.
- Software and subscriptions: Tools like accounting programs, design platforms, or project management systems.
- Business insurance: General liability, professional, or property coverage.
- Marketing and advertising: Website costs, digital ads, business cards, and promotional materials.
Related: These 6 Small Business Tax Deductions Are Overlooked Too Often
3. Are You Tracking Too Many Expenses?
Failing to track expenses is a problem. So is tracking too many business expenses. You can find yourself in a bad situation if you are adding business expenses that are not ordinary and necessary.
If you enter illegitimate business expenses, you could end up paying more in taxes.
If you are audited and the illegitimate expenses are discovered, you may have to pay back taxes, along with interest and fines.
Examples of expenses that often get misclassified include:
- Meals or entertainment that aren’t directly tied to business activity
- Clothing or grooming costs that are personal rather than branded or protective gear
- Commuting between home and a regular workplace (not deductible)
- Family cell phone plans or household internet without clear business allocation
- Personal travel mixed with business trips without proper documentation
Related: The 10 Tax Mistakes You Don’t Want Your Small Business to Make
4. Are You Filing Separate Schedule Cs for Each Business?
If you operate more than one distinct business, you can’t simply lump all your expenses together on one Schedule C.
The IRS requires you to file a separate Schedule Cs (Profit or Loss From Business) for each business activity you own and operate. For example, if you own a consulting business and also sell handmade goods online, each of those activities should have its own Schedule C.
Combining multiple, unrelated activities on one form can distort your results and raise questions if you’re ever audited.
Each Schedule C provides a snapshot of that individual business. You may need to file more than one Schedule C if:
- You run two or more businesses that have different products, services, or customer bases
- The businesses operate independently of one another (for example, a photography studio and a landscaping business)
- The income and expenses can’t reasonably be tracked under one industry code or business purpose
Related: When Should You Hire an Accountant for Taxes? 6 Signs It’s Time.
5. Are You Unsure How to Answer These Questions?
If you went through this list of questions and didn’t know how to answer, now is the time to act.
Failing to accurately track your business expenses can cost your business. Don’t wait until you are stuck with tax overpayments, fines, and fees. Talk to a professional today.
CFO2U offers monthly bookkeeping support that starts at just $300/month. Work with professionals who can answer these questions and ensure you are always accurately tracking your business expenses and avoiding the costly mistakes that come with inaccurate record-keeping.
Learn more about our affordable monthly bookkeeping programs and then schedule a free discovery call to craft a custom plan for your business.
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