These business expense mistakes may be common, but they are easily avoidable.
Business expenses are an ordinary and necessary cost of running a business. Unfortunately, many freelancers make common business expense mistakes like not knowing what’s tax-deductible, forgetting to keep receipts or failing to have a robust expense tracking system.
As a result, they don’t really know how they’re spending their money, often aren’t prepared for the tax season and even forget to charge clients for billable expenses.
If this sounds familiar, or you’re just genuinely curious about the types of business expense mistakes freelancers make, then you’re in the right place. Here are nine of the most common business expense mistakes and how to avoid making them.
1. Not Knowing What Expenses Are Tax-Deductible
Some freelancers don’t know what tax deductibles or tax write-offs are, or that they’re even eligible for them. Others have a vague understanding but aren’t sure what expenses are deductible.
The IRS rules are constantly changing, which only adds to the confusion. An act was passed only recently, for example, which eliminates entertainment as a deductible.
As a result of all of this, freelancers often run into trouble come tax time and end up overpaying on their taxes.
If you’re struggling with tax deductibles and want to wrap your head around them once and for all, read our complete guide to small business tax write-offs. In it, you’ll learn that:
Write-offs reduce your total taxable income They’re not the same as tax credits There are 17 common small business tax write-offs 2. Failing to Use a Robust Expense Tracking System
The way you record expenses is just as important as actually recording them in the first place. If you track expenses using Excel spreadsheets and keep a shoebox of receipts, you’re probably:
Missing out on certain tax write-offs that reduce your taxable income Wasting time inputting and updating data Haphazardly cross-referencing and wading through bank statements Feeling stressed come tax time as receipts and bank statements are everywhere
Cloud accounting software helps you avoid the headaches of manual expenses tracking. The right software will:
Prepare you for the tax season by giving you quick access to a detailed record of all your expenses and tax-friendly expense categories Connect to your bank account and update with your most recent spending without you lifting a finger Let you take a photo of a receipt with your mobile and upload it to the cloud for safekeeping 3. Being Completely Hands-Off with Expense Tracking
Even though cloud accounting software can track most of your expenses automatically, don’t make the mistake of being completely hands-off.
No matter how good the software is, it still requires your input. Nowhere is this more apparent than with cash withdrawals. For example, 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 was for or what expense category it should be assigned to.
4. Not Keeping Receipts
Making the business expense mistake of not keeping receipts can lead to you forgetting to claim certain cash expenses as deductible when filing your tax returns. It can also put you in a precarious position if you’re ever audited. The IRS requires that youContinue reading