In the ongoing struggle to keep up with bookkeeping, many business owners mistakenly believe that as long as they have some type of log of income and expenses they are good to go. But it isn’t enough. The IRS expects a little more out of us than that. They expect your log of expenses to be categorized.
Categorize every expense? Say what? Adds another level of work to the never-ending list, doesn’t it?
If you’re like many others I’ve spoken with who are hearing this for the first time, your next question is inevitable:
How do I categorize? And that question leads to so many more. What categories do you track? Do you get to make up your own categories? Are there very specific categories? If so, what goes into which category? Where do you even begin? The life of you, the business owner, just got a little more complicated!
If you are utilizing QuickBooks, then you’re in luck. QuickBooks has simplified the process somewhat for you by creating a Chart of Accounts. The Chart of Accounts includes categories you need to be able to track your expenses.
If you are not utilizing QuickBooks, then you need to develop a system of your own. Start with a list of categories for your recurring and one-time expenses. Some of the categories you should be using to track expenses include:
- Advertising and Marketing — this includes promotional expenses such as printing of fliers, business cards, and networking fees.
- Commissions and Fees — money paid for commissions or finders’ fees.
- Vehicle — whether you have a company vehicle or not, you should at least be tracking mileage.
- Depreciation — the value your physical assets lose each year.
- Insurance — general liability, work comp, errors and omissions.
- Legal and professional services — attorney fees, accounting/bookkeeping fees, independent contractor fees
- Office expense — supplies, furniture, and equipment needed to run your office
- Rent or lease — office space, vehicles
- Travel and meal — travel, meal, training, workshops, etc.
What do you do about paying yourself, you might ask? How is that categorized? The answer to that depends on what type of business you have. Is it an LLC, a corporation, an S-corp? If you’re not categorizing your paycheck correctly, it can lead to severe penalties. Talk to your accountant about what’s best for you and your business.
The above list is not an all-inclusive list of expenses, but rather a starting place. Talk to your bookkeeper, accountant, or CPA about what expenses related to your business the IRS expects you to track. Keep in mind that every accountant has their own unique approach to accounting and taxes. Talk to them about what he or she would like you to include in each category.
Don’t have a bookkeeper? Contact me today.