So, if you’re wondering when are taxes due in 2024, you’re asking the right question at the right time. Let’s navigate this maze together, untangling crucial dates, potential shifts, and everything else you need to know to stay on top of your 2024 tax obligations.

April 15th is widely known as the day personal and business taxes are due each year in the United States. However, the April 15th deadline isn’t always so cut and dry.

The date business taxes are due depends on a few things and can vary due to factors like:

• Business type
• Fiscal year-end date
• Request for tax extension

When are Taxes Due in 2024

Important Tax Deadlines for Businesses

You should always keep in mind the importance of these dates. They represent the filing deadline, the final day for submitting your business tax returns. Missing these tax payment deadlines might result in penalties or interest charges. So, it’s always better to ensure you’re ready to submit well ahead of these deadlines.

Check out our guide on what to do if you miss a tax deadline.

All Organizations

• January 16th, 2024: Fourth Quarter Estimated Tax Payments.
• January 31st, 2024: Form 1099 – Payors send to Payees.
• January 31st, 2024: Form W2 – Employers to send to employees.
• February 28th, 2024: File information returns (1099s) with IRS(paper).
• March 31st, 2024: Form 1099 – File information returns (1099s) with IRS (electronic).
• April 15th, 2024: Form 114 – FBAR-Filing (extension available, no filing required).
• April 15th, 2024: First Quarter Estimated Tax Payments.
• June 17th, 2024: Second Quarter Estimated Tax Payments.
• September 16th, 2024: Third Quarter Estimated Tax Payments.
• October 15th, 2024: Form 114 – Form 114/FBAR –(if extended) Filing.
• December 16th, 2024: Fourth Quarter Estimated Tax Payments.

Delaware Corporations

• March 1st, 2024: Delaware Annual Franchise Report

C-Corporations

• April 15th, 2024: Form 1120 – File return and pay tax due.
• April 15th, 2024: Form 7004 – File extension and pay estimated tax due.
• October 15th, 2024: Form 1120 – File extended tax return (if applicable).

S-Corporations

• March 15th, 2024: Form 1120-S – File return and pay tax due.
• March 15th, 2024: Form 2553 – S-Corp Election.
• March 15th, 2024: Form 7004 – File extension and pay estimated tax due.
• September 16th, 2024: Form 1120-S – File return (if applicable).

Non Profits

• May 15th, 2024: Form 8868 – Automatic Extension to File.
• May 15th, 2024: Form 990 – File return.
• November 15th, 2024: Form 990 – File return (if extended).

Partnership (including LLC)

• March 15th, 2024: Form 1065 – File return and pay tax due.
• September 16th, 2024: Form 1065 – File return (if applicable).

Sole Proprietorships

• April 15th, 2024: Form 4868 – Extension to File.
• April 15th, 2024: Form 1040 – File return and pay tax due.
• October 15th, 2024: Form 1040 – File return (if applicable)

Note that if you are using a fiscal year that isn’t the calendar year, your tax filing deadline is different and depends on your business entity and when your fiscal year ends.

Check out these other posts:

• Cash vs. Accrual Accounting
• C-Corporation vs. S-Corporation
• Controller vs. Comptroller vs. CFO

Consequences of Missing Tax Deadlines

Should you miss a tax deadline, you’re likely to face consequences such as interest charges, penalties, and even potential loss of refunds owed. The IRS doesn’t take kindly to tardiness when it comes to business taxes due. If you fail to file, the tax bill can quickly increase due to interest and penalties.

The consequences of missing tax deadlines can be severe. For instance, if you miss an estimated tax payment deadline, the penalties and interest charges depend on how much you owe and how late the payment is. It’s not just about the financial impact; your business reputation can also take a hit.

Let’s say you find yourself unable to pay your tax bill in full. It’s crucial you file your taxes as soon as possible anyway and consider setting up an installment plan for the remaining balance. Remember, failure to file is a serious issue.

Electronic filing is your best bet. It’s the fastest, most accurate way to file your taxes. And if you think you’ll miss a deadline, don’t panic. Request an extension. It’s always better to preemptively act than face the consequences of missing tax deadlines

The Internal Revenue Service (IRS) will apply a Failure to File penalty to all businesses that submit their 2023 tax return late. The Failure to File Penalty is:

• 5% of the business’s unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes. However, the IRS charges interest on penalty fines.
• Generally speaking, it might potentially be wise to make a bit of a larger extension payment so that one will have a refund and definitely avoid penalties and then know that the additional refund will get rolled into their Q1 estimate for the next year (two birds with one stone).

The best way to avoid penalties from filing a late tax return is to apply for a tax extension on time.

What Is a Tax Extension?

A tax extension is an application filed with the IRS to get an additional six months to submit a tax return. The application can be filed electronically or on paper and must be done before the original tax deadline.

The extension typically gives a business six months to file its taxes. While extensions can provide breathing room, they don’t delay the tax payment due dates. So, even if you’ve got an extension, make sure to estimate and pay any owed taxes by your original due date.

Penalties and interest will still be charged on any outstanding balances, so filing a tax extension is crucial if you think you might not make the original deadline.

Requesting an Extension for Tax Filing

You’ll often find that you need a bit more time to prepare your business taxes properly; fortunately, the IRS allows businesses to request a six-month tax filing extension. This tax extension gives you breathing room if you’re behind on your paperwork, but remember, it’s an extension to file, not an extension to pay what you owe.

1. Partnerships and S-Corps must file by March 15, 2024. If you need more time, use Form 7004 to request an extension to September 15, 2024.
2. C-Corps have until April 15, 2024, to file. With Form 7004, the deadline extends to October 15, 2024.
3. The extension doesn’t delay the date to pay taxes. You may face penalties and interest if you miss the filing deadline and owe taxes.

2024 Deadlines to file business tax extension

Note: The deadline to apply for a tax extension is the same date as the tax return filing deadline. Only when an extension application is submitted will the tax return deadline be extended to the dates listed in the above table.

Reasons to File for an Extension on a 2023 Tax Return

Businesses might need more time to file their taxes for a few reasons. These can include:

• You are waiting on paperwork or information from another party, such as Form 1099.
• Your business is complex, and you need more time to hire a reputable bookkeeping firm.
• Your business is expecting a net operating loss carryback.
• You need more time to organize employee plan documents.

How to file an extension for business taxes

The type of business you operate will determine which form to use when applying for an extension to submit your business’ 2023 taxes.

• For sole proprietors and certain single-member LLC’s, fill out IRS Form 4868
• Corporations, partnerships, and multimember LLC’s should use IRS Form 7004

When are Taxes Due for Quarterly payments in 2024?

Estimated Tax Payments

Upon filing, businesses that expect to owe more than $500 in income tax must make estimated tax payments throughout the year. Estimated tax payments are to be made quarterly; they can be submitted online or posted in the mail with Form 1120-W.

The deadlines to submit your business’s quarterly estimated tax payments are as follows:

When are taxes due for quarterly payroll payments?

In addition to annual business tax deadlines, businesses are also responsible to know when taxes are due for quarterly payroll taxes. These taxes include Social Security, Medicare, and federal income tax withholding from employees’ wages.

For 2024, the due dates for quarterly payroll taxes are as follows:

• Quarter 1 (January 1 – March 31): April 30, 2024
• Quarter 2 (April 1 – June 30): July 31, 2024
• Quarter 3 (July 1 – September 30): October 31, 2024
• Quarter 4 (October 1 – December 31): January 31, 2025

It’s important to note that these dates may change slightly based on weekends and holidays. It’s always a good idea to double-check with the IRS or consult with a tax professional to ensure you have the most accurate and up-to-date information.

Deadline to Send Tax Forms to Contractors

A business that works with contractors will need to report non-employee compensation using Form 1099-NEC. In this situation, the business must send Form 1099-NEC to the contractor no later than January 31.

When preparing your 2023 tax return, be sure to send the Form 1099-NEC to all contractors hired in 2023 and the IRS no later than January 31, 2024.

Are you ready to start preparing taxes for 2024? Let indinero’s experts help.

Preparing and filing taxes can be a complex and time-consuming process, especially for businesses. Having a team of experts by your side to tackle the heavy lifting of your tax needs will help ease the frustration of tax season and help you find ways to maximize your business’ tax deductions.

At indinero, our accountants and tax professionals are always up to date on the latest tax changes. We offer a variety of services to businesses of all sizes, including tax preparation, filing, and consulting. We also offer fractional CFO services to help businesses with their financial planning and forecasting.

If you’re ready to get started or if you have any questions, please contact us today. We’d be more than happy to help you prepare for next year’s tax season.

As 2023 draws to a close, it’s pivotal for small businesses to scrutinize their financial status and strategize effectively for tax reduction and a robust financial future. Despite a static tax legislative landscape, the looming possibility of future amendments necessitates proactive tax planning. At indinero, we’re committed to guiding you through these complexities and optimizing your financial strategy with our comprehensive business tax services.

Analyzing Financial Statements for Tax Efficiency

Maximizing Tax Savings through Financial Insights: Delve into your financial statements to accurately gauge your business’s income and expenses. Up-to-date accounting is vital for an unobscured view of your tax situation. Our team specializes in dissecting your financial statements, uncovering potential tax-saving avenues, and developing pinpointing strategic business tax strategies.

Strategic Tax Management: Deferring Income and Accelerating Expenses

Enhancing Financial Position through Tax Timing: Navigate the intricacies of deferring income or accelerating expenses to influence tax savings significantly. Leveraging the timing of property or equipment purchases before the year’s end can yield maximum tax write-offs, especially under favorable depreciation regulations.

In most cases, you should defer income when it’s unclear when you’ll actually receive payment. For example, if you worked for a client in December 2022 and haven’t yet billed them for your services, you might want to defer income until January 2023 to lower your 2022 taxes.

Other factors to consider include whether the work will still be applicable in the future and how much additional risk there is that you won’t be repaid. If the work will still be applicable and there is no additional risk, deferring income can be a good idea even if payment isn’t received immediately. Conversely, if there is more risk that the work won’t be repaid or the payment isn’t likely anytime soon, waiting until payment is certain before deferring income might make more sense.

When it comes to taxes, there are a few key concepts to understand: deductions, credits, and tax rates.

A deduction is an expense that a taxpayer or business can subtract from their taxable income before applying a tax rate to calculate the total amount of business taxes owed. Some common types of deductions include mortgage interest, state and local taxes, and charitable contributions.

A credit reduces the amount of taxes you may owe on a dollar-for-dollar basis. Some common types of credits include the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC). The EITC provides a tax break to low-income families, while the AOTC offers a tax break to students who are pursuing postsecondary education.

Tax rates vary depending on how much money you make and where you live. In some cases, tax rates may even change depending on your marital status or whether you have children living with you.

Navigating Business Meal Deductions

Understanding Deduction Rules for 2023: With the holiday season nearing, be mindful of the guidelines for business meal deductions. Although the 100% restaurant meal deduction isn’t applicable this year, certain business meals might still qualify for full deductions. Proper categorization of these business expenses is critical in small business tax planning.

Utilizing Net Operating Losses (NOLs)

Turning Losses into Potential Savings: If your business’s deductions surpass income, resulting in a Net Operating Loss, understand how to apply these NOLs against taxable income from other years within specific constraints. Our experts are here to aid you in maximizing the tax advantages of NOLs.

Leveraging Energy Tax Incentives for Sustainable Practices

Reducing Carbon Footprint While Gaining Tax Benefits: Investigate tax incentives designed to encourage eco-friendly business practices. 

When certain criteria are met, organizations may be able to claim tax credits for items such as:

• Electricity is produced from certain renewable sources (including geothermal, solar, and wind facilities).
• Energy-efficient home improvements.
• Alternate fuels – Organizations may be eligible for a tax deduction based on the energy savings generated for qualifying energy-efficient commercial building property.
• The rules are complex, and careful research and planning can benefit business tax planning.

Broadening Your End of Year Tax Planning Strategy

Exploring Additional Considerations for End-of-Year Planning and Business Taxes:

• Employee Retention Credit (ERC): Qualify for ERCs if impacted by COVID-19 in specified periods.
• Charitable Contributions: Be aware of the limitations on charitable contribution deductions for 2023. A deduction is limited to 10% of the corporation’s taxable income. Careful planning is essential to maximize the tax benefit potential of your charitable contributions.
• Leverage Tax Credits: One lesser-known example is the work opportunity tax credit (WOTC), designed to help employers hire and retain individuals from certain target groups that have faced significant barriers to employment. This includes members of families receiving benefits under Temporary Assistance for Needy Families (TANF) program, felons, veterans, and those from other target groups. The credit is worth up to $2,400 per eligible new hire. 
• Digital Assets & Cryptocurrency Taxes: Stay informed about the tax implications of transactions involving virtual currencies.
• Transactions Between Business and Owners: Optimize tax considerations in dealings between businesses and business owners. This includes aspects such as loans, distributions, and salaries. Be sure to structure these most beneficial elements from a tax perspective.
• Estimated Business Tax Payments: Regularly review these payments for liquidity management and compliance.

Concluding Thoughts: Partner with Indinero for Tailored End of Year Tax Planning

Year-End Planning for Your Business’s Success: Leverage our expertise to optimize your tax planning, develop effective tax strategies, reduce tax liabilities, and set your business on a path of prosperity. Engage with the business tax professionals at indinero to discover how we can elevate your end-of-year tax planning and bolster your business’s financial health.

You do this by using an unprofitable year to offset future profits, which may sound a bit complicated. Not to worry. In this guide, we’ll present the rules and limitations of net operating losses and demonstrate how to use them to save money and grow your business. 

Navigating tax advantages like net operating losses can be a headache. InDinero’s business tax services can save you time and money, as our team of professionals will ensure you’re making the most of every tax year. 

What is a Net Operating Loss?

Net operating loss occurs when a business’s permissible deductions surpass its taxable revenue during a given year. In other words, when a business loses money.

What Are the Uses of a Net Operating Loss?

Business owners can use net operating loss to manage their finances strategically. There are two primary ways to do this: 

Method 1: Using a year of poor performance to offset a good year

No business wants to record profit losses, but if you do, this tactic can be a silver lining. Think of this method, called a net operating loss carryforward,  like a coupon; things went poorly this year, but you’ll get a discount on next year’s taxes.  

When done correctly, your tax professional will apply last year’s loss to this year’s profit as a tax deduction. For example, if your business lost $50,000 last year but earned $150,000 this year, you could apply a net operating loss carryforward and only pay tax on $100,000 of your profits from this year. 

Related: Learn how to calculate gross vs. net income to determine whether you’ll be profitable or take a loss this tax year. 

Method 2: Strategically timing investments

A profitable business can invest in growth tax-efficiently by taking advantage of net operating loss rules. 

Imagine this scenario: You’ve turned a $100,000 profit, and your estimated taxes are $25,000. However, you’ve been considering expanding and need to invest $200,000 to do so. 

If you make that investment before the end of the tax year, you’re now reporting a loss of $100,000. You’ll no longer owe the $25,000 in estimated taxes, and you can use the loss to reduce your tax burden in subsequent years. 

For those interested in strategically timing expenses to reduce tax liability in other ways, consider reading our article on cash vs accrual accounting.

Net Operating Loss Carryforward Example

These methods can seem complex when written out, so we’ve put together an image to demonstrate how a business could use a net operating loss to save money on its tax bill.

In year zero, our hypothetical business reported a net negative profit. It wasn’t so bad that they closed up shop, and they were profitable the next year. They used their year-zero loss to offset taxable profits in the following year; this is a net operating loss carryforward.  

Who Can Claim a Net Operating Loss?

Any business that records a loss in a given year may claim a net operating loss. This tool can be used by sole proprietors, LLCs, partnerships, C-Corps, and even S-Corps.

Related: How to convert LLC to S Corp or C Corp

However, the rules for partnerships and S-Corps are considerably more complicated than others. IRS rules state that these entities generally cannot use a net operating loss carryforward, but that the partners or shareholders themselves may take the deduction, in proportion to their share of ownership, to offset their personal incomes. 

Those specific rules are outside the scope of this article; if you’re in this situation, consider engaging inDinero’s accounting services for assistance.

Net Operating Loss Limitations 

Using net operating losses can save your business significant money, but the IRS has guidelines to ensure the rule isn’t abused. 

First of all, the rule only applies to income. That means other liabilities, such as sales or property taxes, cannot be reduced with this method.

Net Operating Loss 80% Limitation 

A carryforward can’t be used to reduce next year’s tax liability to zero. The maximum deduction in any given year is 80% of taxable income. That means no matter how large of a loss you’ve taken in previous years, you’re still on the hook for at least 20% of your net profit. 

Thankfully, the IRS allows businesses to carry their net operating losses indefinitely into the future. The old rules set a cap at 20 years, but the Tax Cuts and Jobs Act did away with this limitation. 

If you can’t use the entire net operating loss because of the 80% annual limitation, you can still use it next year.

Net Operating Loss Carryback Limitation

A net operating loss carryback is where this year’s losses can be used to earn a tax refund from a prior year’s taxes. Unfortunately, recent IRS rule changes nearly completely forbid this practice. 

For tax year 2021 and forward, this practice is completely prohibited for everyone except farming businesses and certain insurance companies. ¹

Losses during tax years 2018, 2019, and 2020 can be carried back.²

Section 382 Limitation

The IRS (in Section 382 of the tax code) generally limits net operating loss carryforward for corporations that have ownership changes greater than 50%. They do this because they don’t want the owners of corporations to sell their net operating losses. This is called a Section 382 NOL limitation—or, simply, a 382 limitation.

This annual limitation is calculated by multiplying the market value of the business by a percentage, usually about 2%. If a business was valued at $2 million, the maximum net operating loss carryforward they’re eligible for is $40,000 (2% of $2MM). 

Note: The Section 382 NOL limitation rules are complicated, and this article only covers the basic ideas. To explore more about this limitation, speak with an expert from our business tax services team. 

Record Keeping and Documentation

Keeping detailed records of your finances is essential if you want to take advantage of net operating losses. 

Not only is it impossible to know how much of a net operating loss you’re eligible for without these records, but you’ll also need these in case of an IRS audit. 

We’ve written about how to keep track of business expenses by systematizing record-keeping. If you’re not already using an automated software tracking system, give that article a read.

Conclusion

Running a profitable business is challenging. Fortunately, the IRS does its best to encourage the survival of as many businesses as possible; net operating loss carryforwards is one such form of assistance. 

For more help managing your business’s financial side, contact Indinero today. 

1. https://www.irs.gov/publications/p536&sa=D&source=docs&ust=1698870518244185&usg=AOvVaw0GRMyrVMQAt_x6Esdw5lTk ↩︎
2. https://crsreports.congress.gov/product/pdf/IN/IN11296&sa=D&source=docs&ust=1698870518244449&usg=AOvVaw2xpXZxsBZa4LldeX5zo8gQ ↩︎

This article is a part of our ultimate guide on business expenses and tax deductions. We’ll cover everything from the general rules and efficient record-keeping to incorporating tax-deductible personal days into your trip. Let’s dive in. 

Understanding Business Travel Expenses 

When deducting travel expenses, there are two essential factors to remember: 

1. The clear distinction between business and personal spending
   
2. The thorough documentation of all expenses you intend to deduct. 

No deductions are allowed for either personal or non-documented expenses. 

But even with these distinctions, it’s still hard to know what exactly counts as a business expense, especially if you mix business and personal travel. So, let’s establish what the IRS considers valid travel and business expenses. 

From here, we need to answer two questions: What does the IRS consider “travel,” and what is a valid business expense? 

What Counts as a Business Expense? 

The IRS language on this topic is broad. As long as the expense is considered “ordinary and necessary” and is backed up by documentation, it’s an allowable expense. 

In specific terms, an ordinary cost refers to an expense that is commonly practiced and accepted in your line of work. In contrast, a necessary cost pertains to something helpful and appropriate, but not critical, for the functioning of your business. 

Because of the broad applicability of “ordinary and necessary,” sometimes it’s easier to know what counts by knowing what doesn’t. In short, you can’t deduct for clothing, club membership dues (even if used for business purposes), or anything strictly for personal use. For more information, see our article on nondeductible business expenses. 

What Counts as Travel? 

According to IRS guidelines, business travel involves trips taken primarily for business purposes that require you to stay away from your “tax home” for more than a regular workday. Simply put, this means sleeping overnight somewhere other than your home. 

You might think that your “tax home” is simply the city where you live. Usually, that’s correct. However, if your work and home are substantially different places, your “tax home” is where the business is located. In other words, living in one city and working in another is considered commuting rather than a deductible travel expense. 

Since this deduction is intended for temporary work assignments, it’s not considered a business travel expense if the trip lasts longer than a year. In the eyes of the IRS, if you’ve been away from your tax home for that long, you have likely moved to a new location altogether (and should, therefore, change your tax home). 

What About Mixing Personal and Business Travel?

As long as the trip is for “primarily business,” meaning more than half of the days away are spent conducting business rather than personal matters, the entire trip is acceptable for business for tax purposes. 

For instance, if you spend seven days away from your tax home, four on business, and three visiting family, this trip is considered business travel. However, this trip would no longer count if you were to visit family for four days and work only for three. 

Notably, a day in transit (such as taking a flight or driving to your destination) still counts as a work day, even if some of your time traveling could be considered personal. 

However, suppose you’re a solopreneur and decide to bring a guest on the trip who splits the cost of accommodations and travel with you. In that case, only the portion you were responsible for is deductible. 

International vs. Domestic Travel

For international trips, one must only spend over 25% of their time abroad working for it to be considered a business trip. This contrasts domestic trips, where one must dedicate more than 50% of their days to business purposes.

Business Travel vs. Commuting

It is essential to distinguish between business travel and commuting, as commuting expenses are not deductible. Business travel refers to overnight trips taken away from your regular place of work. On the other hand, commuting pertains to the daily travel between your home and your regular place of work.

Valid Business Travel Expenses

Given the broad “ordinary and necessary” definition the IRS provides, sometimes having a list of allowable business travel deductions is helpful. 

Except for meals, which are 50% deductible, all of the following are 100% deductible travel expenses:

What Transportation Costs Are Deductible?

Transportation expenses are a fundamental part of any business trip. Deductible transportation costs include airfare, train tickets, car rentals, and local transportation (such as taxis or rideshares) to travel between your accommodations and business destinations. 

Is Gas Tax Deductible?

In a word, yes. This is slightly different than the travel expense deduction, but there’s quite a bit of overlap. 

If you pay for gas on a rental vehicle, it’s fully deductible. Should you pay for gas with your vehicle, then the deduction depends on whether you use the standard mileage or the real expense deduction method. 

For more information, see our article on mileage reimbursement. 

Is Luggage a Business Expense?

Yes, luggage is one of the many business expenses you’ll have during a business trip. This includes purchasing new luggage for business trips and any fees you pay to check luggage. 

What Accommodation Expenses Are Deductible?

Business travelers can also deduct lodging expenses while away from their tax home. The expenses incurred can be deducted if you stay at a hotel, motel, Airbnb, or other lodging facility. 

Are Miscellaneous Supplies and Materials Deductible?

These expenses are generally deductible if you purchase supplies or materials necessary for business activities during your trip, such as presentation materials or office supplies.

Meals While Traveling

The IRS is quite generous with meal deductions while you’re traveling. During a business trip, 50% of the cost of meals is deductible. This includes a quick bite at the airport, ordering takeout, and even a trip to the grocery store. 

Recording Business Travel Expenses

Like any business expense, you should only deduct travel expenses that you can back up should the IRS have questions when you file. 

We recommend entrepreneurs maintain separate business and personal banking to avoid commingling funds Next, we encourage our clients to use a modern tax software solution that integrates with their bank accounts. That way, the software automatically logs every expense on a business card. 

Lastly, keep copies of receipts for your business travel expenses. Most software solutions have apps that allow you to take photos with your phone, making record-keeping a breeze. 

For a deeper dive, see our article on how to keep track of business expenses.

Conclusion 

By maintaining proper documentation and following IRS guidelines for business travel expenses, entrepreneurs who spend a lot of time on the road can maximize their tax savings. 

If you spend a lot of time on the road, keeping track of all your business expenses can be complex. Whether you use a simple spreadsheet or software solution, there are already so many demands on your time that self-managing your bookkeeping may not be worth the cost savings. Consider indinero’s outsourced accounting services for your business needs if this sounds like you. 

In this article, we’ll tell you everything you need to do to track expenses on autopilot, organize tax filings at the click of a button, and keep your most important financials front and center. 

Once you’re done, check out our ultimate guide to business expenses and tax deductions to learn how to leverage impeccable record-keeping to minimize your tax bill.

What Exactly Is a Business Expense?

The definition is simple enough, but the application is anything but.

The IRS considers business expenses anything “ordinary and necessary” for the operation of your business. In this case, “ordinary” means an expense that is common in your industry, while a necessary expense is one that you need to run and grow your business effectively. 

We cover the specific interpretations and deduction limits in full in our ultimate guide to business expenses and tax deductions, an article on small business tax deductions, and finally, our primer on non-deductible expenses.

Benefits of Tracking Business Expenses

Effectively tracking expenses offers several significant benefits that can impact the overall success of a business. Here are some key benefits to consider:

Improved Decision Making

Accurate tracking provides important insights into how your business is spending money. Identifying areas of overspending and prioritizing your highest ROI investments can help you achieve your business goals.

Accurate Tax Reporting and Maximization of Deductions

By maintaining proper records, you can ensure you’re claiming all benefits available to you. Additionally, using an automated bookkeeping solution makes filing taxes at the end of the year considerably less time-consuming.

Better Cash Flow Management

Tracking helps you gain a clearer understanding of cash flow dynamics. Monitoring inflows and outflows allows you to anticipate cash shortages or surpluses while proactively managing liquidity needs. 

Stakeholder Confidence

Demonstrating financial transparency with detailed financial records goes a long way toward building trust with investors, creditors, and partners. Building these relationships on a foundation of credibility can potentially attract future funding or partnership opportunities.

Audit Preparedness 

The Tax Cuts and Jobs Act included funding for increased audits of high-net-worth individuals. Even if your chance of an audit didn’t increase, there’s always an outside chance that bad luck could strike. Record keeping can prepare you to pass an audit without too much stress or major fines.

Things to Do Before Tracking Expenses

Before thinking about expense categories and regular financial reviews, we have to do some prep work. Taking care of these tasks first will make managing business deductions a lot easier in the long run.

Separate Business and Personal Bank Accounts

If you take just one thing away from this article, let it be this:

The only way to track expenses efficiently is with business bank accounts and credit cards that are completely separate from those you use for personal purchases. It’s a key prerequisite to using time-saving accounting software effectively and comes with the added benefit of preserving the liability protection afforded to an LLC. 

Mixing money makes tracking business expenses a nightmare. It presents problems should you face an audit and perhaps more importantly, makes securing credit or investment more challenging than it already is. 

Since bank loans are often granted in proportion to historical revenue, if your accounts are intermixed, many underwriters will reject the application because they can’t draw a clear picture of your business financials. 

Take it from us—one of the most common reasons accountants are hired is to clean up commingled funds. 

Kick things off on the right track and separate your accounts. 

Spreadsheets or Accounting Software to Track Business Expenses?

Most entrepreneurs start out with a simple spreadsheet to track business expenses. It’s flexible, doesn’t cost a thing, and is relatively easy to manage (for a while) if you know the basics of Excel. 

But as businesses grow, so does accounting complexity. There will come a point when the simple spreadsheet is costing more time than the convenience is worth. 

Quality accounting software can cost as little as $100 a year, and the time it saves is well worth it.

How to Keep Track of Business Expenses

Whether you’ve chosen a spreadsheet or accounting software, business expense tracking follows the same pattern. Record and categorize expenses in one central location, review them on a regular basis, and file with the IRS according to the required quarterly schedule.

There are two general approaches to tracking expenses, and which one you use depends on what you’re trying to accomplish. 

Tracking to Maximize Tax Deductions 

Some business expenses are fully deductible, while others are only partially deductible if you use them for both work and personal reasons. In order to maximize your deductions, be sure to separate expenses according to their degree of deductibility.

Examples of partially deductible expenses include the home office deduction, travel expense deductions, and deductions for business use of a personal vehicle or mobile device. 

Tracking Cash Flow 

Understanding where your money is going is perhaps the most important reason to track business expenses. It helps you answer the all-important question: Are you profitable on a month-to-month basis, and if not, when? 

To do this, separate expenses according to recurring and one-time-only investments. Tracking this way will filter out often large one-time expenses and provide a picture of your growth trend over time.

If you want to learn more about short-term and long-term assets and liabilities, check out our article on Liquidity vs Solvency

Filing Receipts 

One of the most cumbersome parts of tracking business expenses is keeping hold of receipts. The IRS requires taxpayers to keep copies to verify all tax deductions they might claim, but storing and organizing is a lot easier said than done. You could keep paper receipts, but these can be a mess to organize once tax time rolls around. 

Fortunately, the IRS allows digitized copies of receipts. 

All major bookkeeping software have apps that allow you to take photos directly from your phone. Just snap a photo when you make an in-person purchase, and you’re done. Additionally, your accountant will thank you for storing these in a central location (such as  Google Drive, Dropbox, or within your accounting software). 

Choose an Accounting Method: Cash or Accrual

You can choose between two different accounting methods, giving you power over your expenses’ timing. Used strategically, you can offset the timing of your tax liability and potentially lower your overall bill. 

If you’re unsure which is which, don’t worry—our deep dive on the cash vs. accrual methods of accounting covers it in detail, but here’s a breakdown for now: 

Cash accounting is where a transaction is recorded only when the money lands in or leaves your accounts. 

Accrual accountants record things when the money is promised before receiving it. 

The former method is the most common, but having control over the timing of expenses and revenue with accrual accounting has important implications for the size of your tax bill. 

Imagine that it’s the end of the fiscal year, and you’ve decided to make a major investment in your business. Is it better to record that expense on this year’s tax bill or the next? 

Recording it this year can register a new business expense and lower your current tax liability. On the other hand, if your profit already puts you in a lower tax bracket, delaying the expense until next year could save money in the future. The difference between cash and accrual accounting affords you the choice. 

Review Expenses Regularly 

Establishing a systematic review process ensures consistency and accuracy in business expense tracking. To keep up to date, consider the following:

• Designate a specific time and frequency to categorize expenses
  
• Set guideposts that prompt you to review, such as a quarterly stakeholder financial review
  
• Reconcile any errant expenses, such as commingled funds or inaccurate records

Conclusion

Implementing a systematic expense-tracking approach can save you time, ensure accuracy, and deliver valuable insights into your business’s financial health. If you haven’t already, start using bookkeeping software instead of a spreadsheet, and if nothing else, definitely set up separate business and personal bank accounts. 

Are you considering hiring a bookkeeper? When businesses reach a certain size, outsourcing bookkeeping to outside professionals is often worthwhile so you can focus on what you do best. Consider our small business accounting services when that time comes or if you need help cleaning up commingled funds for an investor pitch or tax filing.