Business Owners Tips for Tracking Income & Expenses For Taxes | Attorney Aaron Hall

Business Owners Tips for Tracking Income & Expenses For Taxes

In this video, you get answers to these questions:

  • What is the best way for business owners to keep track of the companies income for tax purposes?
  • How can you keep it simple when tracking expenses?
  • What do you need to keep for IRS purposes?
  • What are the four categories you need to track?
  • What are expenses that are not deductible?

Video Transcipt

What is the best way for business owners to keep track of the company’s income and expenses for tax purposes? I’m Aaron Hall. You can learn more about me at aaronhall.com and please see the disclaimer below this video. As a business owner, you know that the income and expenses can very quickly get out of control as you start having receipts and invoices and credit card transactions. Business owners often ask, “What’s the best way to track this?” Well, first off, if there were a single best way, everybody would do it and this wouldn’t be a question. The reason it’s a challenge is it depends on the business. It depends on whether you’re trying to be paperless or you keep track of everything in paper. Do you want to use QuickBooks? Do you have so many transactions that you need software to manage it? Or is a simple spreadsheet like Excel, an option for you?

Many business owners or entrepreneurs start out by keeping it really simple. Maybe it’s on paper. Maybe they have a checking account just for the business at their local bank, and they write checks off that for expenses, and they may also have a debit card. So purchases that would require a credit or debit card would just be pulled straight from that checking account. That’s a very simple way to have a bank keep track of all of your income and expenses. We talked about the expenses, like a debit card and the checks. Let’s now talk about income.

Typically you’re going to get income from a check that is written to you or perhaps you accept credit cards. You might accept credit cards from PayPal, Square or some other provider like that. Perhaps you have an online storefront, an E-commerce store, and that particular software is tied to a particular credit card merchant company. That might be an example, but typically that comes in to your checking account. Now if the checking account logs transactions but doesn’t include the person who actually paid, you’ll need to make sure your credit card transaction company, your merchant company, has those reporting features. Because you’ll want to keep that for IRS purposes.

At the end of the year, your tax preparer’s typically going to ask you four questions, and so money will fall into one of these four categories. For example, if you’re putting together an Excel spreadsheet, you’d probably have four columns at least for the buckets that this money drops into.

Column number one is for income. Income that comes into the business. So whenever somebody pays you for your services or buys a product from you, that’s the income. And then for expenses, you’re typically going to have three types. You’re going to have just basic business expenses, insurance, software, all these other things that you have regular ordinary business expenses for, things you use right away. Next, you’ll probably have a category for money that is used to purchase items, larger items that lasts multiple years, and those might need to be amortized. And then finally in this fourth bucket you’re going to have meals and entertainment, or perhaps other expenses that are not deductible. It used to be that meals and entertainment were deductible but starting in 2018 they’re not. There are plenty of other articles and videos online that talk about that.

I suppose there is one other category and that is profit. At the end of the year or maybe throughout the year you might be pulling profit out of the business. And so you might call that an expense. It’s typically called a profit distribution, but that profit is going to go to you and that then will be subject to income tax on your tax return.

So there you have it. That’s a simple way to keep track of a very small business in a checking account and with a credit card merchant company. As you grow, typically bookkeepers are going to want to see software like Xero, X-E-R-O. Or QuickBooks Online is probably the most popular one out there. Often if you use an accountant or bookkeeper, they’re going to have their preference regarding which you use and from my experience, QuickBooks Online tends to be the most popular. Everybody has their favorite software, but as you grow, that’s typically going to be the direction you go. Unless you have some proprietary accounting software for your industry or that ties in with your other backend software. To learn more, feel free to check out my other videos or visit aaronhall.com.