Small Business Expense Tracking

Congratulations!  You’ve started working for yourself.  Whether you are now the owner of a small business or have just started a new side hustle, expense tracking is key to your tax preparation success.  Expenses detract from your taxable income, providing an accurate picture of what you actually took home. 

How Do I Track Expenses? 

As you get started in your new business, MBJ Accounting recommends two ways to keep track of your expenses – either through Quickbooks or the use of a spreadsheet.  

Quickbooks is a popular accounting software for small businesses and is a great tool if your spreadsheets become too difficult to manage.  Services include payroll, inventory control, invoicing, bill paying and time tracking and range in cost from $15 to $200 per month.  Learn more at quickbooks.com

If your accounting needs are minimal, or you are just getting started, spreadsheets are a great way for low-cost tracking (for free through Google Sheets or with your Microsoft Office Excel license). 

What Expenses Should I Track? 

The purpose of tracking expenses is to understand the cost of your business and provide an accurate picture of your net revenue.  So, you should track all expenses related to your business including: 

  • Start Up Costs:  Legal fees and costs to the Secretary of State for establishing your LLC are tax-deductible.  Unsure if you should create an LLC?  MBJ Accounting can help you navigate the pros and cons. 
     
  • Professional Services:  Any support you receive from paid professionals like mechanics, attorneys, accountants, marketing specialists, etc. 
     
  • Utilities / Rent:  Including lease payments, phone, electric, internet, etc.  Keep reading for more guidance if you work from home or use your personal cell phone for business. 
     
  • Cost of Goods:  This refers to materials or products that you purchase to resell to clients.  Goods are different from supplies, which you use to do your job.  These are different classifications so should be kept separate.  
  • Freight / Shipping:  The costs to ship goods is also tax deductible. 
     
  • Supplies:  These are items that are used regularly in the course of business.  This can include everything from printer paper to specialized tools.   
     
  • Insurance:  Any specialized insurance you have for your small business is tax deductible. 
     
  • Travel:  Mileage, tolls and parking costs are small business write offs.  Keep reading for more information on what you can deduct. 
     
  • Meals:  Meals and entertainment purchased while doing business are tax deductible.  However, the IRS does require an itemized meal receipt with the name of the establishment, the date of service, the items purchased, the amount paid for each item and the tax. If the tip is not included in the total, it should be written on the receipt.  You should also be sure to log who and what the meal was for in case of audit.  
  • Marketing Expenses:  Costs for printing, advertising, website, etc. are tax deductible. 

I Work from Home.  How Much Can I Deduct? 

If you work from home exclusively (as in, have no other place to do business), there are two ways to capture the costs of working from home.  You must select one option or the other. 

  • Regular / Actual Expense Home Office Deduction:  To use the regular method for deducting your home office, you must determine the actual expenses of your home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 

Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.  Learn more about home office deduction from the IRS. 

  • Simplified Home Office Deduction:  Allows for $5 per square foot up to 300 square feet or $1,500, as well as allowable home-related itemized deductions.  Learn more from the IRS about a simplified home office deduction. 

What about Cell Phone and Internet? 

Cell phone and internet costs are most likely shared between business and personal use, especially if you work from home.  A portion of the overall costs can be deducted for the months that you were in business.  50 percent of the overall costs is a safe amount.  If you feel that you use a more significant percentage, you may need to provide additional documentation, like an itemized phone bill. 

How Do I Track Mileage and Vehicle Expenses? 

Similar to the home office deduction, there are two ways to track vehicle expenses, and you cannot switch between the two. 

  • Actual Expenses:  To use the actual expense method, you must determine what it actually costs to operate the vehicle for the business portion of its use.  This includes gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles. 
     
  • Standard Mileage Rate:  As of July 1, 2022, the standard mileage rate is 62.5 cents per mile.  In order to calculate your mileage deduction, you need to keep a careful log.  Whether you keep a log book in your car, maintain a spreadsheet or utilize an app like MileIQ or Driversnote for tracking, you must be able to provide documentation for your claimed mileage. 

Additional Tips for Expense Tracking: 

  • Track the Details:  Your accountant is not liable for the expenses you provide.  Thus, it is important to log expense details.  As you track your expenses, be sure to log the vendor, amount paid, date paid and a description of the expense.  This information can help your accountant identify any trends and help you be prepared in case of an audit, especially for mileage and meals. 
      
  • Keep Your Receipts:  Whether you keep physical copies or electronic versions, you need to keep all expense receipts for at least three years for audit verification.  Tax returns should be kept for at least seven years. 
     
  • Up-to-Date Expenses Can Help with Tax Projections:  If you make quarterly payments or want to be prepared for what you will owe in April, having current expense logs can help you and your accountant make accurate projections of your tax liability. 

Looking for a handy tool to track your expenses?  We’ve developed a two different spreadsheets for you to utilize – for free!  Happy accounting! 

Is Your Retirement Account Helping Your Tax Return?

We all dream of retirement – especially on days when the alarm goes off too early. But could your retirement account be helping you with your tax return now? Things have changed since last year. Here are some things to consider before you file your 2021 tax return.

Check Your Tax Credit Qualification

Depending on your adjusted income, you may qualify for a tax credit for making certain contributions to your IRA or employer-sponsored retirement plan. Read more about the Saver Credit eligibility to see if you could take a credit of up to $1,000.

Avoid Paying an Early Withdrawal Penalty

If you withdraw from your retirement accounts before age 59 ½, you are subject to income taxes plus an additional 10 percent early withdrawal tax. However, due to the COVID-19 pandemic, in 2020 there were many exceptions that waived this fee. Most of them have been reduced at this point, but you can still avoid paying an early withdrawal penalty if you are using the funds for post-secondary education or as a first-time homebuyer. Click here to learn more about exceptions to tax on early distributions.

Rollover Your Retirement after a Job Change

If the post-pandemic economy has you changing jobs, avoid income tax by transferring your 401(k) directly to another 401(k) or IRA. Without a direct transfer, 20 percent of the amount withdrawn will be withheld for income taxes and you could also owe the early withdrawal penalty.

Don’t Forget about Required Minimum Distributions

If you are age 72, your retirement account may feature required minimum distributions. This is an increase from the previous 70 ½ age requirement. While this was waived in 2020 due to COVID, that is not the case for 2021. The penalty for missing a required minimum distribution is 50 percent of the amount that should have been withdrawn – in addition to the income tax due. Consider directing your required minimum distribution to the charity or church of your choice to avoid tax liability.

Dodge Double Distributions

Avoid increased income taxes by ensuring you do not take two distributions in one year. You are required to take your first minimum distribution by April 1 of the year after you turn 72 (or 70 ½ if you were born before July 1, 1949). Following this distribution, subsequent withdrawals must be taken by December 31 each year. This could mean that you end up with two distributions in the same tax year if you wait until the April deadline, which could bump you into a higher tax bracket.

Similarly, by taking smaller distributions before age 62 can help spread your tax bill over multiple years, rather than dramatically increasing your taxable income once you turn 72. This would all depend on your other income at those ages.

If you have questions regarding how your retirement account could be influencing your income taxes, don’t hesitate to contact MBJ Accounting about setting up an appointment.

Issuing 1099s: What You Need to Know

The Internal Revenue Service requires that Form 1099s are issued by January 31.  This means that you can’t wait until tax time to determine if you need to be issuing these important documents.

What Is a 1099?

A Form 1099 refers to one in a series of IRS tax forms used to document income other than those outlined by a Form W-2, which includes salaries, wages and tips.  The IRS requires a business to issue a Form 1099 when services are rendered for a cost of $600 or more annually.

So, what does this mean for you?  If you are a contractor, you may be familiar with a 1099 as the form your client issues as proof of the services you have provided.  What you may not have considered is when your business needs to be the one issuing the form(s).

How Do I Determine if I Need to Issue a 1099?

Form 1099(s) are generated by businesses.  If you earn a salary or hourly wages by working for a company that is not your own and are issued a W-2 at the end of each year to file your personal taxes, you don’t need to worry about filing a Form 1099. 

However, if you are self-employed, receive income directly from your clients or customers or file a separate business schedule with your taxes annually, you should determine if any of your expenses require you to issue a 1099.  Thus, if you are a hairstylist, provide childcare services, conduct in-home sales or do lawncare on the side – as just a few examples – keep reading.

Specifically, the IRS requires a Form 1099 be issued when the following four conditions are met:

  1. You made a payment to someone who is not your employee;
  2. You made a payment for services in the course of your trade or business;
  3. You made a payment to an individual, partnership, estate, or in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

If your business meets these four criteria, the next step is to determine if the payment was for a qualifying expense.

What Type of Expenses Qualify for 1099s?

Any time that you pay a non-employee for a service-related expense of $600 or more, you should issue a Form 1099.  Review your company’s records to see if you have paid any vendor more than $600 for any type of service or labor.  This does not apply to the purchase of goods, but rather, services such as:

  • Attorney Fees
  • Bookkeeping
  • Booth / Business Rental Space
  • Cleaning Services
  • Consultation Services
  • Graphic Design
  • Inspections
  • Lawncare
  • Maintenance / Repairs
  • Marketing Consultation
  • Professional Photography
  • Tax Advising and Tax Preparation Services

These are just some common examples of the types of services for which your business might use a separate, non-employee contractor.  For example, if you purchased a company vehicle for $20,000, you would not need to issue a 1099.  However, if you paid $20,000 in maintenance and repair for your fleet of company vehicles over the course of the year, you would want to issue a 1099 to your mechanic.

Rent is another type of expense that can require a 1099.  If you rent a specific space to conduct your trade – like a booth at a hair salon or an office in a multi-tenant building, you should include your landlord among your vendors needing a Form 1099.  Conversely, individuals working from a home office generally capture rent expenses elsewhere on their tax returns.

If you purchased a company vehicle for $20,000, you would not need to issue a 1099.  However, if you paid $20,000 in maintenance and repair for your fleet of company vehicles over the course of the year, you would want to issue a 1099 to your mechanic.

Does My Vendor Require a 1099?

Once you’ve determined what expenses may qualify for a Form 1099, you next need to assess what type of vendor or contractor you utilized.  If the individual or company providing your service is incorporated, you do not need to issue a Form 1099.  However, if your vendor is a sole proprietor, an LLC, LLP or PC, you’ll need to issue a 1099.

There are some exceptions to this rule, especially with attorneys.  When in doubt, contact your vendor directly to determine if you should issue a 1099. 

While you’re at it, be sure that you have the necessary information to issue the 1099, including the contractor’s legal name, what type of legal entity the vendor is and their Employee Identification Number (EIN) or Social Security Number.  The easiest way to collect this information, is to have your vendor complete a Form W-9.  Click here for a blank form that you can send. 

It is a best practice to collect this information when you issue the payment, so you may have already collected it.  However, it’s best to double check that none of their information has changed and always have a signed W9 on file.

How Did You Pay the Vendor?

The last step when determining whether to issue a Form 1099 is to establish exactly how much you paid and how you issued the payment.  If you provided payment through your bank account, such as with a check, debit card transaction or automatic payment, you will need to issue the 1099.  On the other hand, if you provided payment through a third-party service like PayPal, or with a credit card, the merchant is responsible for issuing a Form 1099K.

What Is the Benefit of Issuing a 1099?

The process of issuing Form 1099(s) can be complicated, especially if your company uses multiple contractors and vendors.  The IRS does require this documentation for services rendered in excess of $600, and your vendors will probably be depending on the information to file their own tax returns.  Thus, it’s important to take 1099s into consideration early in the year to ensure that you are issuing them in a timely manner. 

This can also help you avoid paying penalties to the IRS.  Specifically, if you do not issue a 1099 for the 2019 tax year by January 31, 2020, you will owe:

  • $50 per 1099 if filed not more than 30 days late
  • $110 per 1099 if filed 30+ days late but before August 1
  • $270 per 1099 if filed after August 1

Additionally, if you intentionally fail to file a 1099, then there are additional consequences.  Click here to see the full penalty schedule.

In many cases, it can be advantageous for you and your company to file Form 1099(s) as it provides documentation of expenses incurred in the course of your trade or business.  This frequently indicates a tax write-off, so it does work in your favor to take a good look at whether you should issue 1099s.

There are actually 10+ different types of Form 1099, so it is best to consult a tax professional when issuing these forms.  Contact us as soon as possible if you think that you need to issue 1099s for your small business.  We’re here to help make tax season as easy as possible for you.