How to Keep Track of Business Expenses

As a small business owner or self-employed individual, you’ll likely rack up many expenses related to running your business.

Categorizing and tracking them correctly will ensure you can claim all the tax deductions you are entitled to. You’ll also be prepared for potential IRS audits and can budget, forecast, and understand your business's financial health to a greater extent. 

Keep reading for tips on how best to organise your business expenses and track them with ease, and the types of expenses you can and cannot deduct. 

Open a dedicated business bank account

The easiest way to separate your personal and business finances is to open a dedicated business bank account you use solely for business transactions. 

With a business bank account, you’ll receive an itemized statement at the end of each billing cycle, which you can easily import into many accounting software tools.

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Use an accounting software

Using reliable accounting software is the easiest way to simplify tracking your business expenses. Plenty of software programs are available for different sizes of businesses and activities. 

These tools can automate expense tracking, categorize expenses, and generate financial reports. They can also sync with your bank account to import transactions automatically.

Tracking expenses manually

Spreadsheets are another practical way of recording business expenses if you prefer a more hands-on way of keeping on top of your business expenditures.

Your spreadsheet should include columns for the following:

• Dates
• Expense types
• Amounts
• Vendors
• Expense purposes

We have created a simple spreadsheet template for tracking your income and expenses.

Categorize your expenses

Categorize your expenses into different categories, such as:

• Purchases
• Gross receipts (the income from your business)
• Asset costs
• Office supplies costs
• Business mileage
• Business travel, meals, and entertainment costs
• Professional services costs
• Utility costs
• Educational costs
• Employment taxes

Consistent categorization will help you with budgeting and identifying which expenses are deductible.

Keep receipts and documentation

Make sure you track all of your business expenses, including mileage, meals, travel, equipment, lodging, etc. 

As per the IRS requirement, you should keep all receipts and invoices for your business expenses for at least 3 years from the date you file your taxes. In addition to keeping physical copies of your receipts, take pictures of them and store them in a cloud-based service as a backup in case you lose the physical ones.

Find out more about IRS receipt requirements.

Record expenses regularly

Make it a habit to record your expenses daily or weekly. Regular updates will ensure you don’t miss any deductible expenses. Set aside a specific time each week to update your financial records.

Types of deductible and non-deductible business expenses

Differentiating between business and personal expenses is crucial for IRS compliance, but you should also be aware of which types of expenses you can write off and to what extent. 

Direct expenses

Expenses exclusively for business purposes, such as office supplies, are fully deductible.

Also read: Self-Employed Tax Deductions

Partial business expenses

Some expenses, like a home office, require you to determine the business portion of the expense. For example, if you use 20% of your home’s square footage for your office, you can deduct 20% of your home expenses. Learn more about office-use-of-home expenses in our dedicated article.

Non-deductible personal expenses

Personal expenses, even if incurred during business activities, can't be deducted—for example, personal ad hoc expenses on a business trip are not deductible.