How to track business expenses digitally and save time
To err is human, and expense tracking is no exception. From office supplies and marketing ads to insurance payments and bank fees, you’re regularly spending to support your business. You may handle these expenses yourself, or allow employees to make purchases, too.
As transactions rack up and you spend in new areas, there’s a danger of losing track of where the money is going. Your expenses could outpace income, and you might find yourself struggling with cash flow.
Fortunately, many digital tools make expense tracking easy for the modern business owner. Features like receipt uploads and automatic expense categorization save hours of manual input and reduce the risk of errors.
Expense management isn’t just about avoiding financial issues. You can earn significant tax deductions and credit card rewards when you properly document purchases. We’ll explain exactly how to track business expenses and see the benefits.
Examples of business expenses
Business expenses are the costs that a business incurs to generate revenue. These are the purchases and payments that are critical to operating the business—compensating employees, producing goods or performing services, and renting or owning a place of business, physical or online.
Some common expense examples include office supplies, utility bills, advertising costs, and credit card processing fees. The following business expenditures may also be familiar to you:
- Employee salaries and wages
- Interest payments
- Vehicle costs such as gas and maintenance
- Business liability insurance
- Travel costs, including plane tickets and hotel rooms
- Routine maintenance and repairs
- Web hosting fees
If a business operates to create a profit, some of its expenses are tax deductible. Claiming a tax deduction lowers your taxable income, in turn reducing the amount of taxes you’re required to pay—good news for business owners. Certain expenses, like business meals, are only partially deductible. Others require you to use specific formulas when deducting costs, like vehicle expenses or home office deductions.
But new business owners need to know that many startup costs—the first investments you made to begin running your business—can’t be deducted. We’ll expand below.
Many business expenses are tax deductible, but some aren’t
To “write off” or deduct a business expense on your income tax return, it must be “ordinary and necessary,” according to IRS guidelines. Here, “necessary” doesn’t mean indispensable—the expense simply has to be common and accepted in your industry, and helpful and appropriate for your trade or business type.
On the other hand, you need to separate the following expenses, because typically they aren’t deductible. For these expenditures, however, you can usually deduct the costs of depreciation and amortization, or the loss of value over time. (The IRS describes these “capital expenses” in detail online.)
- Startup costs: These are the purchases you made to set up your business before you began operating. Examples include marketing costs and wages for training employees.
- Business assets: Also called capital assets, this category includes property, vehicles, furniture, machinery, and patents.
- Improvements: Any expenditures related to the betterment of property, whether you’re restoring, adapting, or adding onto it. Examples include rewiring a building, replacing a roof, or replacing a large part of machinery.
The IRS provides many examples of capital expenses versus deductible expenses to help you better understand the difference. Regardless of whether it’s deductible or not, it’s to your advantage to record all expenses. You don’t want the IRS to point out you’ve made tax filing mistakes.
How to track business expenses: 5 tips to save time and reduce errors
Keeping track of business expenses is a challenge. You may have multiple individuals spending on behalf of the business. Then you have significant expenses—like rent and payroll—that make it hard to remember minor costs such as packs of paper clips and pens. We'll go over five tips that ensure your business spending is accounted for, organized, and ready for tax season.
1. Set up a business bank account
It’s best practice to keep personal finances separate from business finances. Your business income should be easy to monitor and distinct from other sources of income, especially if you’re pursuing other business ventures. It also makes expense tracking that much easier—some bank accounts automatically sort transactions into unique spending categories.
Sole proprietors aren’t required to open a business bank account, but other business entities are. If you’re part of a limited liability company (LLC), partnership, or corporation, you must open a business bank account.
You’ll need a few items to open this new account:
- Your doing business as (DBA) name
- Your business license
- Your Employer Identification Number (EIN) and/or Social Security number (SSN)
- Your Articles of Incorporation or Articles of Organization
Be sure to research the various fees, rewards, and rules surrounding business bank accounts before you make your decision.
2. Use a receipt app or expense tracker to digitize receipts
Holding onto receipts and sorting through them is tedious work—and thankfully, not necessary for today’s business owners or employees. Receipt apps, also called expense tracker apps, from companies like Shoeboxed and Brex, dramatically simplify expense management.
Rather than digging through paper notes and email receipts come tax time, mobile apps let you and your employees capture transactions when they happen. When you make a purchase, take a picture of the receipt. Then, upload transactions directly through the app or via text message, whether you’re online or offline.
The Brex mobile app goes the extra mile—it reconciles receipt details with your account charges in real time, so any discrepancies are spotted right away. Employees can also submit expense reports digitally, so costs don’t get lost. You can quickly approve individual transactions, or set up automatic approval.
If you have a Brex corporate credit card, you can even get mobile phone reminders to upload receipts when you (or your employees) use your card.
3. Use a business credit card or corporate credit card
When it comes to managing finances, the fewer moving pieces there are, the better. Select a dedicated business credit card or corporate credit card to track expenses more easily. House your business transactions under one account, while issuing credit cards to trusted staff members as needed. (If you don’t have one already, you’ll want to put a credit card policy in place.)
Credit accounts like Brex also include insightful analytics tools and offer granular transaction details. Get access to features like on-the-go receipt tracking with customizable notes and instant expense categorization.
Another benefit of using a business credit card is that you’ll build business credit. This is a crucial advantage for founders in need of financing.
4. Integrate your financial tools with accounting software
Most financial experts advise small businesses to use accounting software to avoid common accounting and bookkeeping mistakes. Today’s platforms range from pared down to extremely robust so that business owners of all skill levels can manage their books.
When you use popular accounting software like QuickBooks, Expensify, or NetSuite, you can connect it to your other financial tools. Integrating your accounts—business bank accounts, credit card accounts, payroll software, receipt apps, and more—creates a seamless financial network.
If you’re the bookkeeper or accountant for your business, syncing accounts lays the foundation for accurate expense tracking. You can also generate detailed financial reports and essential business statements at a moment’s notice, so you’re more financially aware.
5. Define your business expense categories and review them regularly
Organizing purchases into distinct business expense categories is key to successfully writing off business expenses at tax time. Whether you use all-in-one accounting software or a simple Excel spreadsheet, set up expense categories for the costs you encounter frequently in your industry. That way, when you review spending—on a daily, weekly, or monthly basis—you’ll quickly identify any underperforming segments.
Some examples of business expense categories include:
- Professional fees
- Organizational dues
- Cleaning supplies
- Continuing education
- Health insurance premiums
As we’ve mentioned, many expense tracker apps and cash management accounts will automatically sort your transactions. Once you’ve selected the categories you want to track, you can neatly align them across accounts.
Preparing financial reports
You've learned how to track business expenses, so let's briefly examine how to prepare financial reports—another task that’s easier online. You need to record business expenses correctly so that you can put together profit and loss statements and other essential reports.
With most accounting software and other expense trackers, you can select the date range for the financial data you want to pull, and then export the information. You can do so from a mobile device or computer in only a few minutes.
It’s easy once you know how to track business expenses
Changes to the startup landscape are on the horizon. The best thing you can do is keep a close eye on expenses and keep your costs in line. Using a dedicated business bank account and a business credit card is a great place to start. Take your expense management a step further by using a convenient receipt app to record costs.
Institute clear policies on business card usage and approved expenses for your employees. Let them submit expense reports painlessly via mobile app and speed up time for reimbursement, too.
Make sure you get the tax deductions available to you—and lower the likelihood of tax issues—with airtight expense tracking.