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Tax season is like allergy season. Both reemerge each year, whether you like it or not, so you might as well prepare yourself and look for ways to minimize the negative effects. And a key element of tax preparation is categorizing your expenses.
Who knows? Handle things right and you may even find yourself looking forward to the next tax season (though the same can obviously never be said for allergy season). When your expenses are organized, you’ll be able to cruise through your tax reporting and be in a better position to get deductions.
Also known as write-offs, tax deductions are expenses that can be deducted from your overall tax bill. Subtracting the qualified expense from the taxable income you’re reporting leads to a correspondingly lower amount you will owe.
The IRS is understandably interested in what expenses you plan to deduct. For this reason, the agency lays out robust guidelines.
“To be deductible, a business expense must be both ordinary and necessary,” explains the IRS in a general statement on their website. “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Running a small business involves diverse costs. As these expenses pile up over the year, you’ll likely find yourself wondering how to decrease the amount of money you’ll owe in taxes.
“For small business owners, filing tax returns can be a painful experience,” warn the tax experts from Forbes. “Often, data is gathered over an evening or a weekend and can be incomplete. Stay organized all year. It winds up saving time and stress. Keep a separate file for taxes, and make sure income and expenses are categorized in the computer or ledger and are accurate. Then, it is just a matter of printing it out.”
Staying organized is a simple concept but requires plenty of effort to put into practice. Set time aside each month to track expenses, review your budget, and make sure you have all necessary documentation related to your small business expenses. While some entrepreneurs eschew technology, this situation is where a reliable software program can save you time, money, and headaches.
Keeping your expenses organized is a required task if you want to categorize them, which is what the IRS requires for any tax deductions.
“Keeping track of business expenses means more than keeping receipts and entering amounts in a ledger,” says a business finance report from the Houston Chronicle. “The Internal Revenue Service asks you to categorize your expenses. This is because some expenses qualify for full deduction, while others may only net a partial deduction. Also, the IRS scrutinizes certain categories to see if they are unusually high. An example of this would be meals and entertainment. Learn to categorize your expenses so you can get the full tax benefits of your deductions.”
Because most small business owners aren’t trained as accountants, it’s important to enlist the help of a professional. This resource will help you navigate the confusing world of tax code, ensuring you get the maximum deduction possible without crossing any legal or ethical boundaries.
There are many different types of business expenses, but here are 9 categories to consider:
No business will ever qualify for every deduction. But that’s not the point. Your goal should be to carefully track every expense so that the tax experience is better. Every positive action you take in January or May will pay dividends the following April as you navigate the tax reporting process quicker and come away with a lighter bill.
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Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.
Blog
9 min read • Aug 15, 2022