How to Keep Track of Business Expenses

Correctly tracking your business expenses will ensure you can claim all the tax deductions you are entitled to. You will also be prepared in the case of IRS audits and can more easily budget, forecast, and understand your business's financial health.

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Tracking business expenses

Use 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 business expenses.

Keep receipts and documentation

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

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
• Utilities costs
• Educational costs
• Employment taxes

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

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.

Distinguishing between business and personal expenses

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 for your business transactions. This separation of business and personal expenses will make tracking costs easier and prevent you from mistaking personal expenses for business ones. With a business bank account, you will receive an itemized statement at the end of each billing cycle, which you can easily import into many accounting software tools.

How to record business expenses paid with a personal credit card

Record the transaction details, including the date, amount, vendor, and business purpose. Then, transfer the expense amount from your business account to your personal account. Document it as a business expense, and preserve digital or physical receipts as evidence.

Differentiating between business and personal expenses is crucial for IRS compliance. Here’s how to ensure you’re making the proper distinctions:

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