Self Employed Individuals Must Track Business Expenses

Self-employed individuals enjoy unique benefits, but they also have the burden of proving to the Internal Revenue Service that the expenses claimed are legitimate. Business owners need to keep proof of the expenses as well as a business record that backs up the need for that particular expense. Your accounting professional will also tell you that keeping track of expenses, as well as your income, will offer proof as to whether your business is profitable. An accountant, or bookkeeper, will also work with the self-employed individual to pinpoint areas that may be negatively impacting the bottom line and help put a plan of correction in place.

Whether you will record your expenses in paper format or in an electronic program such as QuickBooks, it is crucial to track them as they occur. Remaining up to date on income and expenses is crucial to the fiscal health of your business.

Here is our advice on how a self-employed individual should track expenses:

  • List each expense separately. Attach a receipt to the page if you are tracking expenses manually; file receipts in a folder system by month or type of expense if you are using an electronic system. Make certain the expense notes list the date of the expense and the reason for it as well as the amount.
  • Track mileage if you are claiming a standard mileage deduction instead of actual travel expenses. Enter the date, total miles, and purpose of the trip for which the miles were incurred. It is helpful to keep a notebook in the vehicle to track the mileage as it occurs. If you are using an electronic bookkeeping method, having a physical system to track mileage is a good bookkeeping practice.
  • Create a spreadsheet for your expenses. This can be done either electronically or manually. Set up columns for dates, to whom the expense was paid, the type, and amount of the expense. If you provide services for more than one client, the expense should also be allocated to the client in question.

Spend time with your accountant to learn what expenses are deductible and to what extent. Some of the eligible expenses include:

  • A home office space is typically an expense that can be claimed. In most cases, the self-employed individual will calculate the amount of space the business occupies within the home. The expenses associated with that space could be deducted; those expenses include rent or mortgage, utilities, insurance, and property taxes.
  • Business lunches or travel may be deductible but your portion of the meal must be excluded.
  • Professional fees such, as those spent for an accountant or lawyer are deductible. Fees for professional training and membership in trade groups are also typically deductible.
  • Software and computer hardware equipment, office supplies, advertising or attendance fees at conferences may be deductible. If you use a telephone in the course of your business, the bill may be deductible, but unless you have a separate business line, you will need to estimate the portion of the bill that is business related.
  • Designate a space in your office filing system to store your income and expense records as well as your tax returns. These papers need to be kept for at least three years.

Spending time with a qualified accounting professional is crucial to implementing a bookkeeping system that will not only keep you organized but also help your business remain viable.



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