4 Common Expense-Tracking Pitfalls – And How to Avoid Them This Tax Seasonby
When it comes to gathering business records for claiming business deductions, the idea of sorting through expense receipts and “mining” for deductions makes procrastinators out of all of us.
But proper deduction tracking during the year is not as difficult as you might think. Avoiding these four common pitfalls will help you prepare better and have less tax-time stress.
1. Having an incomplete mileage log: One of the common misconceptions of mileage tracking is that you have to write down your beginning and ending odometer every time you get in and out of your car to complete a business mileage log. The truth is an ending odometer at the end of December, which becomes the beginning odometer for the start of the new tax year, is all you need. That way, you know the total miles you drove during the year. With that, your business mileage log only needs the following three things for each entry:
- Miles driven
- Description of the business purpose
2. Saving receipts: To save the receipt or not to save the receipt, that is the question. The official rule is that a receipt is not needed unless the expense is more than $75, or it is for lodging. But that doesn’t really cover everything. There are two other circumstances when a detailed receipt is still recommended regardless of the dollar value:
- When you pay for deductible items with cash
- When the expense is not obvious
For example, if you purchase office supplies at a drug store, a detailed receipt would be needed to substantiate that the items purchased were not personal. On the other hand, a receipt for a credit card purchase of “Discount Business Cards Only” for $36 would not be necessary to prove the deduction.
3. Forgetting to record business purpose: The most important element of proper record keeping is to document the business purpose for the deduction you are claiming. It can be as simple as writing on the receipt the name of the person you treated to lunch and what you discussed to substantiate a meal deduction, or a note in your calendar to document the business purpose of a meeting for which you claimed deductible business miles. Either way, deductible business expenses must have a legitimate business purpose, and that must be documented.
4. Not “wrapping up” each week: The simplest way to avoid the last-minute stress of gathering your information is to set a fixed time each week to “wrap up” the detailed records for that week. Taking 10 minutes a week while the details are still fresh in your mind will save you hours of frustration and needless stress at tax time. Not only that, you will most likely have more deductions than you otherwise would have, thus saving more in taxes.
Whatever system you use, make your life easier at tax time by documenting your business deductions as you go instead of scrambling after the year is over.
About the author:
William Olsen, CPA, is co-founder and vice president of product development for Orem, Utah-based Deductr, a developer of expense-tracking software for small business owners.