If you've been in business long, you've found that one of the most annoying details of day-to-day operations is keeping track of how you spend your company's money. If you don't stay on top that $3.70 you spent last week on postage, you'll find yourself confronted with a disheveled heap of receipts and a ton of missed deductions when it comes time to tackle your tax return.
The trick to staying organized, as always, is to log expenses as soon as you incur them. We've created an Excel spreadsheet that records your expenses in standardized categories—taxes, wages, rent, and the like—and then estimates the total deductible business expenses that you can claim on Schedule C of your United States tax return.
Let us emphasize that we do not warranty our spreadsheet as a tax-preparation tool; it's designed only to help you keep your records in order and get a general approximation of how your out-of-pocket deductions are shaping up.
For example, we haven't included a statement of your business's net profit or loss, since those calculations can involve fairly complex depreciation on purchased equipment and held inventory, just for starters. Our best advice is to use the information you collect in our spreadsheet to populate a tax-preparation software tool or, better yet, turn it over to an accountant (those fees are deductible, you know).
If you haven't already done so, go to the IRS site and download its Tax Guide for Small Business. This 60-page PDF document—which is surprisingly coherent for a government publication—contains useful information about writing off business expenses. The tax laws aren't quite as arcane as you might imagine, but if you're serious about running your own business, you should spend a couple of hours getting a handle on these issues.
With these caveats in mind, we think you'll find our little spreadsheet to be a useful organizational tool. We've categorized business expenses on the following tabs:
- Physical Facilities & Services
- Promotion & Networking
- Taxes & Fees
- Wages & Contracts
- Collections & Debts
We've also included a general Summary tab, shown in Figure A, to give you an idea of how your expenses are running for the year.
|The workbook's Summary tab gives you a quick look at how your expenses are running.|
Data entry on each of the tabs is pretty straightforward. Just punch in the date, vendor or creditor, and the amount of the expense in the appropriate column, as illustrated in Figure B. We've also included a field for any notes you may want to make about the transaction. Each of the spreadsheet's seven input tabs has fields for 100 transactions (if you're conducting more than 700, go buy an accounting software package today), and each sheet keeps a categorical tally at both the top and bottom of its display.
The workbook's final tab is the Schedule C estimator, based on 2002 United States tax forms. The estimator simply breaks out your expenses as you categorized them and reports them back in lines that sync with the lines on 1040-series return forms, as you can see in Figure C.
|The Schedule C estimator syncs with line numbers on your U.S. tax return.|
Deductible vs. nondeducible
We wanted our tool to encompass as many of your business expenses as possible, so we included some categories of expense that are not deductible from your United States taxes. These expense categories are marked with light red header columns, as you'll notice in Figure B.
As we said earlier, the finer points of what's deductible and what’s not can get a little hairy. Discuss these issues with an expert before mailing off your return. In general, the nondeductible expenses we've included in our spreadsheet are:
Equipment Purchase and Computer Purchase: The IRS actually considers these to be in the same category, but given that your business focuses on technology, we broke them out into two columns on our workbook's Equipment tab. The fact that you can't write off office and computer equipment creates an argument for leasing equipment (those expenses can be deducted). But then again, you and your accountant can calculate and deduct depreciation on purchased equipment elsewhere on your return.
Corporate Distributions: As the owner of your business, you can transfer money out of the business's coffers for your own use as you see fit. We included a nondeductible category for such distributions on our workbook's Wages & Contracts tab, but the actual tax implications of how you pay yourself depend largely on how your business is structured legally. If you hold an S Corporation in the United States, you may choose to pay yourself a deducible salary (we have a column for that, too) up to a 401K cap and then take additional funds as distributions at the capital gains tax rate; if you have an LLC, all income passes through to you as an individual, making the corporate distribution issue mute. Again, this is a topic for you and your accountant. For the purposes of our spreadsheet, any transfer logged in the Corporate Distributions column will not be reflected in the workbook's Schedule C estimator.
Principal Payments: It's money you spend each month, but the IRS doesn't let you write off credit payments that apply to principal.
Miscellaneous Nondeductible Expenses: This category covers anything else that may come up. If you're not sure whether you can deduct an expense, our advice is to err on the side of caution.
The rest of the workbook's expense categories are fairly self-explanatory. Our last word of caution for you is to be prudent about what you decide to declare as a business expense, not only for tax purposes but also for accurate reporting on the health of your business. If you occasionally use your personal cell phone for business calls, don't try to write off your whole cell bill as an expense—the IRS frowns on such liberal accountancy, and it just cheapens your business's credibility.
And, of course, keep all your receipts, just to be on the safe side.
Ken Hardin is a freelance writer and business analyst with more than two decades in technology media and product development. Before founding his own consultancy, Clarity Answers LLC, Ken was a member of the start-up team and an executive with TechRepublic.com and ITBusinessEdge.com.