The Benefits of Switching to FreshBooks This Tax Season to Track Your Business Expenses
Unless you filed an extension (which is a great idea by the way), tax season probably feels like it’s right around the corner. Because, unfortunately, it kind of is.
Therefore, now is the perfect time to get your ducks in a row, and prepare for the season. Whether you have things in order or not, it’s never too early (or late) to start improving and organizing your books. Things like tracking your business expenses can be arduous, while other things like accrued expenses can be darn confusing.
How do you keep track of it all? With accounting software like FreshBooks, here’s how.
Business Expenses Couldn’t Be More Important
If you use an Excel spreadsheet to track business expenses, then this will blow your mind. You can simply take a photo of any receipt or import a file into FreshBooks, and it’s instantly tracked and logged.
Here are 4 reasons you should track business expenses:
FreshBooks Profitability Reports help us understand what the gap is between the billable hours and the employee costs. That way we know whether our service models are actually compensating for that gap. Then we can really see it in the profitability of the company overall.
– Zachary Martz
Founder of zmartz Marketing
1. You Become Financially Aware and Improve Cash Flow
Understanding your cash flow starts with understanding your spending and business expenses. It’s much easier to see where your money is coming in than where it’s going out. Keeping an eye on your daily business expenses will help you understand if your expenses are outpacing your income.
This allows you to control costs better and adjust your spending habits, or the spending habits of your employees.
Overall, you’ll have more money to play with and reinvest in your business for growth, employee perks, or whatever the need may be.
2. You’re Better Prepared for Tax Season
If you retain one thing from this article, read this: Business expenses are tax-deductible. Now, many of you know this, but it’s always worth repeating as it’s the best way to reduce the amount of tax your business has to pay. That means more money in your pocket.
Business expenses like lunches, cell phone costs, hotels and airfare (travel expenses), and rent can be tracked and used to reduce your taxable income.
Home-office expenses are a big one too: If you have a home office, you may qualify for the home-office deduction. For example, if your home office is 20% of the size of your home, you can deduct 20% of your utilities, maintenance, and so on.
3. Your Employees Are Happier
If you have employees, like a sales team, they might have business expenses for travel, meals, their phone, and more that they’re paying for out of pocket. Keeping an eye on your spending allows you to allocate some of your liquid cash to reimburse your employees and track their expenses at tax time.
They’ll be happy because they’re reimbursed quickly. And your books will be happy because you’ll have more expenses recorded and ready for tax time.
4. You Can Quickly Determine How Profitable Your Business Is
Understanding profitability is really important for your business to survive. Tracking expenses and income is a great way to understand profitability to easily see how well you’re doing.
Profitability isn’t something you want to guess at, so paying attention daily (or weekly) can keep you from being surprised at the end of the month.
So, What Are Deductible Business Expenses?
Deductible business expenses are either, expenses incurred by you on behalf of your clients while doing work for them, or expenses you incur as part of your daily business operations.
Deductible business expenses are often part of your daily business activities that are outside of personal expenses — and to justify them, you must provide evidence in the form of a receipt. Unfortunately, occasional expenses, such as attending a one-off out-of-town conference for a client project, do not count.
These deductible business expenses are deductible because they’re out-of-pocket, and not part of your life outside of the business (aka personal expenses).
Your business must clearly define what constitutes a business expense versus what does not to avoid confusion for your employees.
For freelancers or business owners, it’s not quite as clear because the Internal Revenue Service doesn’t explicitly give you clear guidelines for what types of business expenses you can claim. That means, knowing what legitimate business expenses are can be complicated, and there are deductible expenses that you may choose not to rebill to clients at all.
For example, you probably don’t charge your client for a portion of your internet costs even though, in many cases, these costs are reimbursable, especially if incurred while on the road. Instead, you claim this expense to lower your taxes.
Common Examples of Deductible Business Expenses
Below, we’ve broken down some examples of business expenses that can be used as tax deductions, some are fixed expenses (a fixed cost like a mortgage payment) and some are variable expenses (one-time costs incurred like a business lunch).
The business expense examples below aren’t deductible in all cases. It’s really dependent on each situation to understand whether small business activities are associated with a specific cost, ask yourself:
- Is this expense necessary for the completion of work?
- Is it reasonable to charge my client for it?
- Am I incurring it on my client’s behalf?
If you answered yes to these questions, chances are you’ve got deductible expenses. If you’re unsure, speak to an accountant, bookkeeper, or someone who can deduct personal and business expenses. Once you decide an expense is deductible, just make sure your clients know you’ll bill them for it.
Small Expenses
It’s important to plan out any project and try and predict what expenses you want to either rebill or cover the cost yourself. However, it can be tough to think of everything. You may incur many minor expenses on your client’s behalf, which were unaccounted for at the beginning of a project. Things like printing, coffee, marketing costs, and even delivery and postage costs can add up.
If you have a client who tends to make last-minute requests, these are likely costs you may not have accounted for. Therefore, they should be business expenses that you get reimbursed for.
Or perhaps you incurred overseas phone or internet charges. This could have been due to interviewing someone for an article or talking to a consultant to help you with an international marketing plan. The cost of those communications now becomes reimbursable and deductible.
Sure, these are small expenses, and you may wonder, why should I bother spending all this time tracking them…well, because they add up, and that amount needs to be rebilled to your client and/or claimed on your income taxes.
Large Expenses
Then there are also larger business expenses such as travel. This can include meals, entertainment, lodging, and transportation (taxis, air travel, etc).
If you’re on the road often for client work, you likely have to book sleeping accommodations and pay for various meals throughout the day – it can really add up. Without claiming all of these small business costs as deductible expenses, your trip might hardly seem worth it.
However, just because something’s reimbursable and/or deductible doesn’t mean you should go to town and overdo it. There’s usually an upper limit that you’ll agree to upfront with your client.
17 Tax-Deductible (Write-Offs) To Keep Track Of
So while there’s lots of overlap between reimbursable expenses and tax-deductible expenses you use to lower your taxable income, it’s important to know where to put your effort.
I tried QuickBooks initially, and it was just too complicated. I felt like I needed to know debits and credits just to use it. I tried out FreshBooks next and I found it to be so intuitive. I was easily able to do time tracking, expense tracking, and invoice customers. And for my sole proprietorship, that’s all I needed.
– Graham Pugh
Founder, Propel Clean Energy PartnersSelf-Proclaimed Tax Nerd that Saves 44 Hours a Year on Tax Prep Using FreshBooks
Business Tax Write-Offs
1. Home Office Deduction
2. Rental Payments
3. Business Meals
4. Business Travel Expenses
5. Dues
6. Salaries, Benefits, and Subcontractor Payments
7. Phone and Internet Expenses
8. Educational Expenses
9. Marketing and Advertising Expenses
10. Bank Interest and Fees
11. Depreciation of Business Equipment
12. Moving Business Equipment
13. Business Insurance
14. Gifts
Personal Tx Deductions
1. Health Insurance
2. Charitable Contributions
3. Retirement Contributions
Use FreshBooks to Track Every Business Expense
Most business owners know that some of their expenses are deductible. Still, it’s important to know what rules apply to each deductible so you can use it to reduce taxable income and tax bills so that you can get the best tax return possible.
Tracking business expenses for your home office, travel, software subscriptions, and anything else that helps you run your business should be pretty clear to you now.
So you’ve got a handle on what’s typically tax-deductible, but are you tracking all of it in the best possible way? As a business owner, your expenses can be paper receipts, emailed receipts, or no receipts at all, and keeping it all organized is key to being ready for tax time.
Sure, a spreadsheet might work if you only have a few items to track (and time to do so). But as your business grows, so will your items, and you don’t want to run into errors as you expand.
Accounting software like FreshBooks simplifies expense tracking and other more complex accounting tasks. With FreshBooks, you can:
- Track expenses without lifting a finger, so you know where your money’s going. Simply connect your bank account and say goodbye to manual entry.
- Effortlessly assign tax-friendly expense categories, so you’re prepared come tax time.
- Track your expenses on the move via a mobile app (available for iOS and Android).
- Store your receipts in the cloud so you don’t lose them if disaster strikes.
- Easily pull billable expenses into an invoice, so you’re not losing out on income from clients.
Use FreshBooks today to improve how you track deductible expenses, reduce your total tax bill, and get the best tax refund possible.
This Interior Design Firm Simplifies Expensing With FreshBooks
Start a free 30-day trial today, it’s never too soon to get your expenses (and books) in order for tax season.
This post was updated in October 2023.