How to Organize Business Expenses for Tax Deductions

What are small business expense categories?

Business expenses include costs incurred by a company to carry out its operations and generate revenue. Typical business expenses often encompass a spectrum of categories.

• Advertising and marketing: Online ads, promotional materials, and market research incurred to advertise your business.
• Employee benefits and payroll: Wages, insurance, time off, and other forms of employee compensation.
• Inventory costs: The price you pay for products you sell to customers.
• Non-operating expenses: Costs not directly related to operations, like interest paid on a loan, restructuring costs, inventory losses, and legal settlements.
• Office supplies: Stationery, printers, and other office essentials you buy to treat yourself.
• Professional fees: Accountants, legal advice, and consultants.
• Shipping expenses: Packaging materials, postage, and delivery fees.
• Software subscriptions: Ecommerce platforms, accounting software, and other digital tools.
• Travel expenses: Costs associated with business-related travel.
• Utilities: Internet service, electricity, and other operating expenses.
• Web hosting and domains: Annual costs for website operation.

Knowing which expenses are eligible for tax deductions can help save your business money when it’s time to file taxes. This awareness can also help reduce the risk of errors, penalties, and audits.

When to organize small business expenses

Organizing business expenses should be an ongoing process for online sellers rather than a year-end rush. However, there are a few best times to organize business expenses.

• Monthly: Review and categorize expenses regularly to identify discrepancies, errors, or reasons to update your budget.
• Quarterly: Use this time to reconcile accounts in QuickBooks and generate financial statements, including income statements, balance sheets, and cash flow statements. Generating these documents can ensure accuracy in your records and provide a clear picture of the financial health of your business.
• Annually: While organizing expenses throughout the year is essential, it's also necessary to do a thorough review at the end of the year. This review can ensure you've accounted for all expenses.

You should record and categorize expenses as you incur them to allow for accurate tracking and easier review at the end of each month or financial quarter. This habit not only aids in maintaining a clear financial picture for the business and supports tax preparedness.

By keeping expenses organized throughout the year, you can avoid the stress of last-minute complications and maximize potential deductions.

Why is it important to keep track of business expenses for tax season?

Categorizing and tracking business expenses throughout the year can save you time, effort, and potential headaches during tax time.

• Claim accurate tax deductions: Keeping track of all your business expenses allows you to claim accurate deductions on your tax return. Deductions can help you lower your taxable income and the amount you owe.
• Avoid penalties: By keeping organized records, you can ensure you're not missing any important expenses or deadlines that could lead to penalties from the Internal Revenue Service (IRS).
• Engage in smarter financial management: Organizing expenses can also provide valuable insights into the financial health of your business. By tracking expenses, you can identify overspending and adjust to improve profitability.
• Keep a paper trail: Organized records can make any potential internal or external audit process smoother.

By implementing best practices and staying organized throughout the year, you can save time and stress during tax season while gaining valuable insights into your business's financial health.

Types of taxes for business owners and online sellers

Keep in mind that filing your business taxes and remitting sales tax to state and local agencies are very different processes. Understanding sales tax and the business taxes you're subject to is critical for full financial literacy.

Income tax

Your income tax is based on your net profits and must be paid to the federal and state governments, depending on your location. How you file depends on your business structure. That is, yours is a sole proprietorship, partnership, corporation, S corporation, or limited liability company (LLC).

Estimated tax

As a business, your taxes are pay-as-you-go. You may need to pay estimated taxes if you're a sole proprietor, partner, or S corporation shareholder who expects to owe more than $1,000. The same goes for corporations that expect to owe more than $500.

Self-employment tax

If you're in business for yourself, you may be subject to self-employment (SE) taxes. These taxes constitute both Social Security and Medicare taxes. You may be subject to SE taxes if you earn more than $400 or work for a church or a qualified church-controlled organization and earn more than $108.28 in wages.

Employment tax

Employment taxes for those who have employees include Social Security and Medicare taxes, federal income tax withholding, and the federal unemployment (FUTA) tax.

Excise tax

Excise taxes are fees imposed based on criteria like the products and services you sell, the type of business you operate, and the equipment you use. Fuel, machinery, and lottery sales may be subject to an excise tax.

Personal property tax

Businesses in at least 43 states and some jurisdictions may be subject to taxes on tangible or intangible assets. Tangible assets are any physical property you can move or touch, like equipment, furniture, or vehicles. Intangible assets include copyrights, patents, and stocks. 

Tips for tracking business expenses for tax deductions

1. Use accounting software

One of the easiest ways to track and manage your business expenses is using accounting software such as QuickBooks Online or QuickBooks Desktop. These programs allow you to categorize expenses, create reports, and easily export data for tax purposes.

2. Keep receipts and invoices

Save all expense-related receipts and invoices. You may need them as proof of purchase in case of an audit or to dispute any discrepancies on your tax return.

3. Separate personal and business expenses

To avoid any confusion or potential issues with the IRS, it's important to separate personal expenses and business expenses. Open different business bank accounts and credit cards for business transactions.

4. Stay organized throughout the year

Don't wait until tax season to start organizing expenses. Regularly input and categorize your expenses throughout the year so you're not scrambling at the last minute.

5. Consult a tax professional

If you're unsure about how to properly organize expenses or have complex tax situations, it's best to consult a tax professional, like an accountant or bookkeeper, who can ensure compliance with all tax laws and regulations and maximize your deductions.

6. Use accounting automation software

Accounting automation revolutionizes the way online sellers manage their finances. It reduces the hours spent on manual data entry by automatically downloading orders, fees, and expenses from online stores and marketplaces and posting them to the business's accounting solution. Eliminating manual data entry can significantly decrease common accounting errors.

How to organize taxes for small business

Managing your business expenses is just one part of organizing your taxes as a small business owner. Here are some additional tips to help you stay on top of your tax obligations.

1. Establish a chart of accounts tailored to your ecommerce business to help categorize expenses, revenue, assets, and liabilities.
2. Record expenses as they occur using accounting software or expense tracking apps to minimize errors and provide real-time financial insights.
3. Maintain thorough documentation of receipts, bank statements, and invoices.
4. Keep a tax calendar to track filing deadlines, estimated tax payments, and other critical tax-related dates.
5. Be aware of tax-deductible expenses to ensure you're not overlooking any potential deductions specific to online businesses. Misclassifying inventory as a business expense, for example, is a common problem for Amazon sellers. But the IRS classifies certain office expenses, shipping and software costs, and charitable donations as tax deductible.
6. Close your books monthly to ensure that all transactions are accurately recorded and accounted for.
7. Conduct quarterly financial reviews to assess the health of your business and make adjustments to minimize tax obligations.
8. Set aside money for estimated taxes to avoid underpayment penalties.

Online sellers should streamline the tax preparation process as much as possible to mitigate the risk of costly errors and remain focused on growing their ecommerce ventures.

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