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Deducting Business Expenses: Best and Worst Practices

By November 15, 2021November 17th, 2021Business Advice, Tax Advice
Orcutt Deducting Business Expenses

What’s the goal of every business? To make a profit, of course! A business can generate more profit by increasing revenue, managing or reducing expenses, and optimizing tax deductions.

These are our recommended best and worst practices for monitoring and deducting business expenses: 

Understanding Business Expenses 

Expenses are the costs that a company incurs in the process of generating revenue. Importantly, businesses can take properly recorded tax deductions on their income tax returns, provided that the deductions meet IRS guidelines.

Deductions fall in three areas: operating expenses, non-operating expenses, and capital expenses.

Operating expenses are those costs directly related to a company’s main activities. These include the cost of goods sold, salaries, administrative costs, utilities, rent, mortgages, and insurance.

Non-operating expenses are those costs not directly related to a company’s operations such as interest and the costs related to borrowing money.

Both operating and non-operating expenses can be written off during the year they are incurred. Capital expenses must be capitalized or written off according to a timed schedule. 

Recording and Deducting Business Expenses 

Managing and properly recording business expenses has such an important impact on tax deductions and company profits. An important principle we follow is this: “As you properly record and measure expenses, you can improve and leverage them.”

Properly recording expenses helps business owners and executives become more financially aware and more able to achieve better money management. That includes keeping accurate track of cash flow and more effectively determining how profitable a business is to better determine how and when to use funds.

Good record-keeping practices help keep employees honest and happy. They also help identify cost outliers and cost savings. Good practices help take advantage of tax deductions and lead to better preparation for tax season. 

Best Practices for Handling Business Expenses 

To effectively track and record business expenses to get appropriate tax deductions, use these tips: 

  1. Open dedicated business checking and savings accounts. Always keep personal and business expenses totally separate. Building strong banking relationships is important for ongoing business success. 
  2. Get a dedicated business credit card. Use this card only for business expenses. Having a business credit card helps businesses negotiate better agreements with suppliers as well as protecting a business against identity theft. 
  3. Get satisfactory detailed documentation for all business expenses. That includes receipts for all purchases or copies of paid invoices. If necessary, label or make notations on receipts. Digitizing receipts with a receipt scanner can also be helpful. 
  4. Keep a mileage log and detailed records of all business travel. 
  5. Keep all expense records for a particular year organized and together. Review and categorize expenses regularly.  
  6. Keep all records for the IRS-required length of time. 
  7. Use technology to automate record-keeping. 
  8. Get professional accounting assistance with records and tax deductions. 

Worst Practices for Managing Business Expenses

There are also some major mistakes business owners can make when it comes to managing your expenses. Some of the worst practices for recording and deducting business expenses include:

  • Failing to save receipts and expense documentation
  • Not tracking all business expenses
  • Not treating bookkeeping tasks seriously
  • Having disorganized record-keeping practices
  • Making errors in paying employees
  • Being disorganized when dealing with your accountant
  • Failing to reconcile books with financial statements
  • Paying taxes late 

Rely on Orcutt & Company For Expert Accounting Services 

The safest way to properly manage business expenses and get expert financial advice is to outsource your business accounting to a professional partner. Orcutt & Company is a full-service financial solutions provider, with comprehensive service plans designed with the small business owner in mind. We can handle your bookkeeping, payroll, and corporate and personal taxes in one office, with one point of contact. Our integrated approach is designed to ensure that we understand your personal goals and how they integrate with your business finances.

When you’re ready to hand off your payroll processing, reach out. We’ll discuss your needs and develop a plan that’s right for you.