A Basic Guide To Business Audits

Companies usually prepare a set of financial statements disclosing business activities and financial performance once a year. The statements are a crucial source of information for shareholders, investors, and stakeholders. But how can stakeholders trust these reports and the figures they provide? 

That’s when an audit comes in. It assesses whether the financial statements are indeed above board and trustworthy.

This article will cover what a business audit is, why it’s important, and how businesses can simplify their audit process for expenses. 

What is a business audit?    

An audit examines relevant documents to determine whether the business provides accurate financial information and complies with accounting & legal standards. It goes through financial reports and accounting work in a systematic review process. 

Many business owners may immediately relate the word ‘audit’ to the Internal Revenue Service (IRS) assessing their business’s accounting for tax penalties (which can happen). However, an audit more commonly refers to a financial inspection of a company’s financial statements and accounting books. 

The purpose of an audit is to get an unbiased opinion about a business’s records and transactions. It helps the business pinpoint where inaccuracies and inefficiencies are in the system. As a result, the company can understand its operating performance thoroughly and make solutions to improve finances and management processes.   

Different types of business audits

You, your employees, or a third party can perform audits depending on the purpose and the nature of your business. There are various types of audits. By knowing the differences between these types, you can choose the most suitable and beneficial audit plan for your company. 

Internal Audit 

An internal audit is typically carried out within a company by its employees. This type of audit helps the business address its significant ongoing risks and weaknesses. It examines both finance and management aspects to make sure everything is functioning correctly. 

When an internal audit team works independently, free of any outside influence, they will provide a deep insight into improving corporate governance and effectively managing risks. 

Large companies usually have an internal audit committee to update business performance to shareholders or board members. It helps them become more aware of their financial status, hence developing better strategies. That’s why an internal audit is also an excellent tool for decision-making. 

External Audit 

In contrast to an internal audit, an external audit is conducted by an outside source, like a government agency or a financial services company. 

The purpose of this audit is more likely to focus on financial statements. The external auditor will issue an audit report following GAAS (Generally Accepted Accounting Standards). This report gives the auditor’s opinion on whether a company’s financial statements meet these standards and accurately represent its financial position. 

Lenders or investors sometimes require a company to perform an external audit to prove the legitimacy and fairness in accounting records and financial reports. 

IRS 

An IRS tax audit takes place to check and verify the validity of a company’s tax returns.

If your tax return shows any discrepancies, the IRS might select you for a tax audit. Sometimes, unfortunately, it’s random. Yet, the chance of being audited by the IRS is extremely low with less than 0.5% of all businesses audited in 2020. 

But you can never be too careful!

Stay alert of some common triggers that may catch the attention of the IRS such as math errors, unusual donation amounts, or claiming 100% business use of a vehicle. It’s best to avoid the triggers and file tax returns correctly by keeping a sound expense tracking system.

Why is a business audit important?  

Business owners may be terrified of the word ‘audit’. As scary as it might sound, auditing can be a tremendous help for businesses. Think of an audit as a doctor checking your business’ health. It diagnoses problems and inefficiencies in your business and prescribes the remedy to get your company in good shape.

5 major benefits of a business audit

Ensure regulatory compliance 

Sometimes, companies conduct an audit to see if they meet the regulatory standards in their industry. And if they don’t, an audit makes them aware of that. 

Non-compliance can mean paying large penalties, loss of customers, and a damaged reputation. These can cause serious harm to the business’s survival. It’s more than worth the expense and any temporary annoyance caused by an audit.

Improve accounting system 

An audit almost always starts with an accounting system. It goes through major financial transactions, bookkeeping records, receipts, etc. to check the accuracy and look for errors. 

Auditing provides an overview of how the system works and a chance to implement better practices to improve the whole accounting process. 

Prevent fraud 

Sadly, fraud is not uncommon in business, especially when it comes to money. Workplace fraud may go undetected for years and companies could pay a hefty price for that: bankruptcy.

An audit is a great tool to detect fraud or pinpoint where fraudsters can take advantage of the system. By enhancing internal controls, businesses can prevent this from happening again.

Strengthen reputation 

Do you want to raise your company’s capital? Are investors and lenders reluctant to part with their cash? 

An audit may solve that problem for you. It can offer an independent confirmation that your financial statements truthfully reflect the company’s status. It provides financial assurance that everything is as it appears. This can reinforce your image, and provide essential credibility and confidence to your clients, stakeholders, investors, or lenders.

Make better choices 

An audit includes an in-depth analysis of a company’s income, expenditure and management skills. Auditors also make recommendations for businesses on how to improve their performance.  Both give business owners a deep foundation to make decisions for future strategies and planning. 

Overall, a business audit may cost a lot to carry out and create inconveniences. But gaining a deep insight into your company is invaluable and can lay the foundation for future growth.

What is a business expenses audit? 

Audit of business expenses is a crucial part of a financial audit. Throughout this process, auditors gather evidence from accounting entries, receipts, and relevant documentation to check their validity. Then they will evaluate if the expenses were necessary and aligned with internal policies. Any non-business costs claimed as business expenses will be flagged and require further investigation.  

Whether conducted internally or outsourced to a third party, the goal of a business expenditure audit is to double-check the accuracy of expense records, identify any out-of-the-ordinary expenses and eliminate expenses fraud.  

Why should businesses audit their expenses? 

Expenses are a high-risk area for every company. Any incomplete or false records in expenses can lead to severe consequences. For example, an understatement of expenses will result in the overstatement of profit which means you will pay more tax than necessary. That’s only one of many reasons why businesses should conduct audits for business expenses. There are three more important reasons for auditing your business expenses.

Avoid false claims 

This fraud is typical in expense reports. When employees spend their money on business-related items, they will submit expense reports to get reimbursement. While many employees are honest and claim the actual spendings,  some seize the opportunity to use it for their ends. 

Fraudulent expense reports damage a business’ budget and profit and increase the risks of IRS penalties. Auditing expenses help the company examine the documents and related receipts claimed by employees to ensure everything is under control.

Tax returns 

Expenses are closely associated with your tax return. Since forever, businesses always have learned ways to minimize their taxable amounts. Many business expenses are deductible that can be subtracted from a company’s income before it is subject to taxation. 

To know which expenses are deductible and which are not, you need to keep detailed records of spendings and categorize them according to the IRS. However, when dealing with hundreds of transactions per day, it’s easy to make mistakes. An audit of expenses will check through all the data and show you where to adjust or provide assurance that your accountants have done a good job. Consequently, you won’t have to overpay for your income tax. 

Prepare for income statement 

An income statement is a financial statement including the company’s revenues and expenditure. That’s why having accurate numbers on expenses will save hassle later when preparing an income statement. Yet, how do you make sure that your expenses are recorded and calculated properly? Do an expense audit! 

As beneficial as an expense audit is, there can be challenges that make it counterproductive. One of them is the manual receipt process. When businesses still apply manual expenses management practices, auditors will need to review paper receipts one by one to ensure the numbers match the report which is time-consuming

Luckily, Shoeboxed can help you with that and more!

How can Shoeboxed help your business audit? 

Shoeboxed is a helpful tool to simplify your business audit works.

Digital receipts 

In the section above, we’ve mentioned the paper receipts challenge. A simple solution for that is to let Shoeboxed digitize all of your receipts. After scanning, Shoeboxed creates a digital version of your paper receipts. Our software extracts and human-verifies data then store them in a secure location. Quickly, piles of your paper receipts transform into fully categorized, organized, and searchable data that is available anytime and anywhere. The system is time-saving and efficient for auditors. 

Expense tracking 

The whole purpose of an expenses audit is to verify and reinforce the accuracy of expense records. If the company has an efficient process to stay on top of the expenses, the workload for auditing will be reduced and simplified.

Shoeboxed helps you organize all receipts and other audit-related documents into a well-categorized and searchable digital database. By doing so, you can always easily trace back any expense for further use.   

Audit-ready 

In the case of an external audit or a tax audit, both the Internal Revenue Service and the Canada Revenue Agency accept digital images of your receipts. Shoeboxed guarantees to have every receipt legibly scanned, clearly categorized, and always ready for audits!

Audit trails 

An audit trail is a set of documents validating your business transactions. It includes details like the transaction date, type, category, value, and vendor. Audit trails can be simple or complex, depending on the nature of the business transaction. For example, the audit trail of buying a notebook is the receipt, while that of a photocopy machine consists of a few more documents such as the purchase order. 

Shoeboxed creates the easiest system to organize your audit trails with extracting, data-verifying, and searchable functions.  Our software helps not only during audit time but also during daily management. 

It’s no fun with a business audit. But there’s nothing to worry about. Any kind of audit can be extremely useful and beneficial for financial planning and the future growth of your business. 

Besides, Shoeboxed is here to take away all the headaches! 

Try Shoeboxed free for 1 month!

Cryptocurrency Bookkeeping Must-know Best Practices

Cryptocurrencies have been around for some time. Bitcoin, Litecoin, Ethereum, and other digital currencies are now being used in many business transactions and are becoming an important financial instrument. The rising popularity of cryptocurrencies is drawing attention to the businesses that use them to transact, and especially how accounting for these digital currencies can be done properly.

This article provides essential information on cryptocurrency bookkeeping, and accounting best practices with tips to help simplify the process.

What is cryptocurrency bookkeeping?

Cryptocurrency in a nutshell

Cryptocurrency is a virtual or digital currency that is encrypted for security. By means of cryptocurrency, businesses can carry out their transactions peer-to-peer without centralized control or an intermediary such as a bank. According to Investopedia, the operation of most of the currencies is based on decentralized platforms with their blockchain technology, a distributed ledger enforced by a disparate network of computers, which we’ll be explaining in more detail in this article. 

It is noteworthy, though, that cryptocurrencies are, by definition, not currency. In Canada, they are viewed as a commodity and therefore treated as an investment. Therefore, accounting for cryptocurrencies is similar to other securities, such as stocks or bonds. However, in the US and some other countries, cryptocurrencies are considered property, which means that when you acquire any crypto, you need to record it at its market value, just like when you purchase a house or building for example. The same goes for when you sell or use cryptocurrency, you need to make sure to record its value correctly. A gain is made if the value when you sell or use crypto is higher than that when you obtain it, otherwise, you suffer a loss. Such gains or losses, which result from transacting or trading cryptocurrencies are taxable, so every transaction must be kept track of and accounted for in a compliant manner.

For a better understanding of cryptocurrencies and how it works for your business, check out our review article on Bitcoin and cryptocurrency for the e-commerce industry. But first, here are some essential crypto terms that you should be aware of when working with Bitcoin and the likes:

  • Blockchain is a form of distributed ledger technology (a database that is distributed to more than one computer or node) used to support Bitcoin and other cryptocurrencies, comprising pieces of digital information held together to record transactions. 
  • Tokens is a type of digital currency that represents its own asset or utility and relies on its blockchain. Tokens can be traded or transferred between users in the blockchain.
  • Wallet is a system that tracks the ownership of virtual currencies.
  • Mining: An act of earning cryptocurrency without having to put money down on it. Miners provide a service to the blockchain network using special software to solve math problems in return for the acquisition of more cryptocurrencies. Any cryptocurrency earned through this activity should be treated as income and reported accordingly. 

As online transactions are becoming a norm, the advantages of cryptocurrencies compared to traditional payment methods are easy to see. You can easily use an online wallet to send and receive cryptocurrencies with other people who have the same wallet. In this way, cryptocurrencies are not subject to currency conversion fees or exchange rates, which fluctuate and make international transactions cumbersome and costly. However, cryptocurrencies have also posed new challenges to how businesses should do bookkeeping and accounting.

Bookkeeping for cryptocurrency businesses

As a form of digital money that is unregulated by banks or government, cryptocurrency hasn’t been essentially accounted for by existing accounting standards, although most agree that it should be classified as an intangible asset, referring to standards such as International Accounting Standard (IAS) 38 and IAS 21. Due to its anonymous nature which can be exploited for illegal activities including money laundering and tax evasion, it is only a matter of time before the government takes measures to monitor the use of cryptocurrency in business transactions.

Of course, you don’t have to pay any specific income tax or Capital Gains Tax (CGT)  on purchasing goods or services. But as long as you use cryptocurrency for business investment or income generation, the actual tax accountancy surrounding Bitcoin and other digital money will inevitably be applied. To avoid potential troubles with tax and audits, bookkeepers and accountants should grasp some of the basics of crypto accounting as follows:

  • Calculate capital gains and losses based on the adjusted cost base

The adjusted cost base is the average cost for all cryptocurrencies you have obtained, from past to present, and it must be calculated separately for each type of coin you own, in case there are several of them.

  • Check the fair market value on the day of the transaction

Because cryptocurrency can be subject to variations in value, the value of a transaction, be it a commodity trade or a payment, depends on the fair market value on the same day.

  • Make payments to vendors

Payments in cryptocurrencies with a fair market value of $600 and higher must be reported to the IRS, using form 1099-MISC.

  • Record mined cryptocurrencies

It is necessary to record the currency you mined in the income account and the costs incurred by the mining act as an expense in your books. Because, when you’re “mining” cryptocurrencies, you’re creating new value for that currency (the digital equivalent of printing money, without the inflation) and creating compensation for yourself. To record your income and expenses, use tax form Schedule C if you are not incorporated, or Form 1120 if you are incorporated. Schedule C is used when you pay self-employment taxes.

  • Trade cryptocurrencies

Cryptocurrencies are considered property as their holders can sell or transfer them separately. They do not give the holder a right to receive a fixed or determinable number of units of currency. As a result, trading cryptocurrencies is just like day trading. You need to record two things: first, the value of any currency on the day you acquire it, and second, its value on the day it is sold.

The difference in value recorded will reflect your gains or losses. When you do your tax return, record these gains and losses on the required form and categorize them as short or long-term gains or losses based on how long you have the currency.

  • Account for more than one cryptocurrency

Accounting for transactions with one type of digital money is difficult enough, but in many cases, you have to handle transactions between two or more cryptocurrencies. Everything comes into play all at once, and you need to calculate multiple cost bases, adjusted cost bases, fair market values, gains, and losses. It will definitely take a great deal of time and bookkeeping skills to ensure nothing is overlooked and to maintain accurate accounting. But if you keep track every step of the way, it is definitely manageable.

cryptocurrency bookkeeping
Cryptocurrency bookkeeping best practices

Why is cryptocurrency bookkeeping complicated?

Business transactions that deal with cryptocurrencies between blockchain businesses, brokers, or funds often entail using an array of wallets or trading accounts, each with different purposes to serve. Because of the different cryptocurrency systems and formats, to report a crypto transaction for tax purposes, businesses must collect related data from various exchanges and account for them accurately according to regulations. 

Since the value of a transaction is determined by the fair market value on the day it is conducted, the accounting tasks of obtaining, consolidating, organizing all data for various assets at different times and varying prices can be a hassle. Not every business has the willingness and ability to take up that challenge. 

The complexity of this process, therefore, may lead to the reluctance of cryptocurrency businesses to maintain daily bookkeeping tasks, only to find out later that the accumulated workload is getting overwhelming, putting extra strains on accounting efforts for which enterprises must bear the resulting costs.

In addition to the complex and high volume of crypto exchanges, accountants and bookkeepers in cryptocurrency businesses must also deal with the constantly changing regulation of digital assets. With most financial guidelines on reporting and accounting meant only for fiat currency-based businesses and with few assisting tools, managing and tracking different digital assets and meeting compliance requirements can cause major hurdles for any crypto business seeking tax-effective bookkeeping practices. 

Working with highly volatile investments such as cryptocurrencies means that financial professionals have to do their tasks with utmost care. It is part of their duties to fulfill the tax obligations, so the least desirable thing is to fall behind the regulatory updates and make accounting mistakes that harm their companies. 

Cryptocurrency bookkeeping best practices

1. Track all transactions

While accounting guidelines regarding cryptocurrencies remain unclear, crypto businesses can still benefit from executing proper bookkeeping. Keep all proofs of invoices and payments safe and organized to be ready for any tax event or to help your business with a better picture of its financial situation. Besides this, other information that you’d better keep close include the list of exchange accounts, addresses, wallets used for each transaction, and especially the records of cryptocurrency value at the time you obtain it and when you get rid of it.

The burden of keeping up with piling documents can be worrying, but there are bookkeeping-friendly tools to assist you in recording necessary receipts like Shoeboxed. No more missing receipts and messy folders, Shoeboxed digitizes your documents into verified images which you can get access to anytime and anywhere. With its customized reporting feature, Shoeboxed can also help you to categorize all crypto transactions into operational costs, expenses, revenue, or other relevant transaction types.

Because all crypto-related costs, expenses, and transactions need to be converted into fiat currency at the end of the day, it is best practice for crypto businesses to track fiat and cryptocurrency transactions, and then create consolidated reports for both. Accurate data collection surely takes time, but it is the key point of this process that any crypto business must find a way to handle, whether by manual entry or by utilizing supporting software.

2. Integrate automation tools to reduce time and errors

The main problem with using standard accounting programs for cryptocurrencies is that they are only compatible with fiat currency. With the help of specialized software to export the crypto transactions to standard accounting software, though, the booking procedure for cryptocurrencies is becoming easier. There are now increasingly more such tools, so you have the options to take advantage of those with convenient functions such as the ability to integrate with cloud-based accounting systems. Reducing the time-consuming manual input and user errors, it is undoubtedly worth your investment to automate the crypto accounting processes.

3. Comply with rules and regulations

Understanding and adhering to the regulatory treatment of cryptocurrencies is crucial to the success of any business that transacts in crypto. However, defining exactly how to execute a crypto bookkeeping strategy is complicated because cryptocurrency is still a volatile financial instrument, the regulatory practices of which vary widely across different countries. In any scenario, it is wise for bookkeepers and accountants to get accustomed to these distinctions in order to guarantee regulatory compliance, especially if cryptocurrency is being used for international transactions.

Since crypto bookkeeping has not been standardized without an existing bookkeeping framework, crypto businesses have mostly carried out their bookkeeping on a case-by-case basis. Confusions regarding implementing such practices are inevitable, but above all, cryptocurrency is generally classified as a property with applicable property tax principles. Given that fact, it is sensible to prepare all the documents to justify transaction activities for tax purposes, ranging from invoices, proof of ownership of the addresses, to wallet balance.

To look on the bright side, many believe in the potential of the technology under crypto assets to disrupt the current bookkeeping system. Small improvements have been steadily introduced and it may pave the way for a new accounting model to emerge. With changes brought by blockchain technology being underway, accountants and bookkeepers should be aware of the possible opportunities and challenges these changes offer and keep themselves updated with cutting-edge knowledge and technology to stay competitive in the field. our staff from Shoeboxed would be glad if our product could accompany those who need help with storing and organizing receipts, so let us hear your voices on the crypto industry as well as the bookkeeping services you may wish you had.

Share with us your thoughts on bookkeeping for cryptocurrency in the comment section below!

Expense Report Everything to Know for Successful Business

In this article, we will go through some basic fundamentals of expense reporting. Once you fully understand the nature of an expense report, you’ll be sure to make the most of it and improve your business’s productivity and internal control.

Being in business is all about making a profit. But that profit isn’t only about your sales numbers. How to effectively control and minimize expenses is just as important as how to boost sales to achieve the ultimate goal: generate maximum profit. 

Caught between limited financial resources and the pressure to maintain competitive pricing, small businesses these days need to stay more proactive than ever to stay on top of their expenses. One of the most commonly used practices for managing costs among small enterprises is the expense report. 

What is an expense report for businesses?

An expense report is a document filled out by an employee or a partner so they can be reimbursed for professional expenses. They are also used to track company spending.

Expense reports are generally presented as forms, whether in a paper or a digital format. The report can be prepared using accounting software or using a template in Word, Excel, PDF, and so on. 

With the advent of new technologies, several solutions now exist to automate the expense management process. The purpose of these solutions is to free time up for everyone involved in the process, streamline expense reports management, and increase profit. 

What is an expense report used for?

Making reimbursements 

A small business sometimes has their employees pay for work-related expenses out of their own pockets then later, the business owner would make reimbursement for those expenses. This process is carried out by an expense report with 3 simple steps: 

  1. The employee fills in an expense report and lists all the business-related spending such as gas for vehicles, accommodation, or meals. Receipts should be attached to the document.  
  2. The employer checks the expense report for accuracy and validity. 
  3. The requested amount is paid back to the employee.

Sometimes, the process can be reversed in which the companies make advance payment for staff. The employee still needs to submit an expense report to detail expenditures. However, there won’t be any reimbursement. Instead, the employer will just deduct the expenses from the advances and have these transactions recorded in the bookkeeping system. 

Tracking expenses

An expense report is also a great tool to help small businesses keep track of their spending periodically (on a monthly, quarterly, or yearly basis). By reviewing expense reports, enterprises can examine their financial health, determine if they’re spending over or under budget, then analyze the causes and come up with immediate solutions to improve expense management. 

Shoeboxed expense report

Filing tax

Regardless of what type of business you run, filing a tax return is a real headache. From ancient times to the present, businesses have always learned ways to minimize their taxable amounts.

Many business expenses are deductible that can be subtracted from a company’s income before it is subject to taxation. Expense reports are the legal documents to prove just that. Creating an expense report allows you to monitor deductible costs that may not yet be shown on your company bank account, making it a lot easier to write such expenses off at tax time.

Auditing purposes 

Expense reports are valuable evidence for both internal and external audit activities. Unnecessary and fraudulent reimbursement claims are not, unfortunately, an uncommon theme in many workplaces. These reports can help with business audits by providing visibility into what funds are coming in and out of the business. By properly processing these expense reports, owners can examine the details and audit their current businesses’ financial and managerial health. 

As we’ve just mentioned above as well, expense reports are vital for deducting tax. They can be requested for submission as supplemental documents, in addition to reporting total applicable costs on tax forms when submitting taxes with the revenue service at any time. 

What does an expense report look like?

Small businesses usually create expense reports using templates in Word, Excel, PDF, etc, or have them automatically prepared by accounting software. No matter how an expense report is made, it typically should contain these elements: 

  • Employee’s information: name, department, position, their manager, or details of who submits the expense
  • Date: when expenditure was incurred (a receipt showing the same date should be attached)
  • Vendor: where a product or service was purchased
  • Description: the nature of the expense such as taxi fee, meal, or hotel
  • Account: where the expense should be charged to 
  • Amount: the total sum of the expense (this amount should also be on the provided receipt) 
  • Subtotal: the amount for each type of expense listed 
  • Subtraction: adjustments when there are any prior advances paid to the employee
  • The grand total: the final amount of reimbursement requested
  • Note: an extra explanation for any unidentified or unclear type of expenses. 

Sometimes, an expense report may also include a brief summary of the company’s policy regarding which kind of expense is not reimbursable. It’s a good way to remind employees before they submit their expenses, saving time for employers and also raising awareness of spending policies within the enterprise. 

An expense report may look different among small companies, depending on its nature of business as well as each company’s own preference. However, it should always tell you how much the expense is and what it was used for. 

Business expense categories 

One of the most important functions of using expense reports is to help small businesses collect data and categorize business expenses, many of which can be written off in a company’s taxes. Some of the most common expense categories include utilities, travel, office supplies, and rental expenses, but there are many more that small businesses, freelancers, and sole proprietors should pay attention to. 

According to the IRS, as long as an expense is “ordinary and necessary” to running a business in your industry, it’s deductible. That’s why we suggest you should follow the categories listed in the Schedule C form  from the IRS for your expense report if you run a sole proprietorship. Developing categories that match your business and a tax return file can make the tax filing process easier, smoother, save you time, and make sure you get all the deductions that you can.  

We’ve listed below the most common 10 business tax expenses that you can deduct with brief explanations of what’s covered, what’s allowed, and what’s not.

Advertising

You can fully deduct expenses related to promoting your business, including digital and print advertising, social media advertising, website design & maintenance, and the cost of printing business cards.

Business insurance and professional service

You can deduct the cost of your business insurance on your tax return such as business liability or workers compensation. Fees paid to an attorney, designer, architect, or other professionals directly related to operating your business are also tax-deductible.

Office supplies

You can write off office supplies including stationery, office cleaning service, drinks & snacks in the break room, and work-related software. Shipping and postage charges may also be deducted. Bear in mind that you may only deduct the expenditure of materials used in the current year.

Home office expenses

Small business owners who work from home cannot miss this information! Generally, you’d need a space that is regularly and exclusively used for businesses to be qualified for deduction. You can deduct $5 for every square foot of your home office which meets all the requirements, up to a maximum of 300 square feet.

Travel expenses

The first and foremost condition to write off travel expenses is that the travel is qualified as a business trip. Here are 3 rules to help you know whether your trip is qualified or not:

  • The trip must be primarily business-related.
  • The trip must take you away from your tax home, i.e. outside the city or area where your company is located.
  • As well as being away from your tax home, it must be substantially longer than a normal day’s work and it must require you to sleep or rest on the route.

Business interest

A business interest expense is the cost of interest on business loans required to keep operations running. Your deduction is generally limited to 30% of adjusted taxable income while it was up to 50% in 2020 due to Coronavirus. However, this limitation is not applied to small businesses (with average annual gross receipts of $25 million or less over a trailing three-year period), farms, or real estate investment enterprises.

Cell phone and internet bills 

You can deduct your entire bill if you have a dedicated business cell phone or Internet connection. It’ll be a little bit more complicated if you mix business with personal usage. In this case, you will need to calculate and deduct only the percentage used for work. 

Wages and benefits

If you run a small business and hire people, you may deduct their wages, benefits, and vacation expenses. However, don’t include your own wages because they’re not allowed to be deducted by the IRS. 

Donations 

Tax-deductible donations must meet certain criteria such as the organizations you give charity to have to be qualified. Examples of qualified institutions include religious organizations, nonprofit educational agencies, museums, local volunteer groups, etc. There will be different guidelines depending on the nature of your donations such as cash, food, clothing, etc.

Depreciation

When you deduct depreciation, you’re usually writing off the cost of a tangible asset like a vehicle or machinery over the useful lifetime of that item, rather than deducting it all in one go for a single tax year. It’s best to deduct depreciation for costly long-term business investments, so you’re reimbursed for the expense over the entire lifetime of use of the item. 

Medical expenses

You can claim insurance premiums and you’re self-employed and pay for your own health insurance, you can deduct your health and dental care insurance premiums. You can also claim medical care expenses, including doctor’s fees, prescription drugs, and home care.

By designing your expense report template based on Schedule C, you’ll find it much quicker and easier when inserting data into tax forms.

So get organized and save time and money!

What is a monthly expense report? 

A monthly expense report details company outlays paid over the course of a given month. These reports are not typically used for employee reimbursement, but rather to track company or department spending, allocate expenses to specific projects or clients and compare expenses to revenue to determine a company’s overall profitability. These reports are typically organized by category, or payee, and can be tremendously helpful for companies to coordinate planning, budgeting, and resourcing requirements. In times of financial difficulty, a monthly expense report can be used to check how costs can be cut or eliminated to improve profit. 

What is considered an expense? 

Not all costs are expenses. An expense is the cost of operations that a business incurs to generate revenue. It can be salary compensations for employees, train tickets fee, or rental for the office. The summary of all expenses is shown on Income Statements (Profit or Loss Statement) as deductions from the total revenue.

While businesses can write off many kinds of expenses, they are not allowed to claim their personal, non-business expenses as business deductions. They also cannot claim bribes, lobbying costs, penalties, fines, and contributions made to political parties or candidates. 

There’s also a common mistake among businesses when they write off “capital expenditure” as an expense. Capital expenditure (CapEx) is used to acquire, upgrade, and maintain tangible assets such as property, buildings, or equipment. Businesses must capitalize those expenses or write them off slowly over time as depreciation. For example, if you acquire a new oven for your bakery business, the oven should be capitalized and recorded as your asset, instead of a business expense. Identifying the nature of an expense will help you do your taxes properly and precisely. 

Essentially, companies should have strict rules regarding what can be considered a business expense. Employees should be informed thoroughly as well before submitting expense reports for reimbursement. 

Conclusion 

Expense reporting and analysis is an indispensable element of an effective cost management process. However, many small businesses struggle with keeping track of documents and receipts manually which ends up being time-consuming and unproductive.

Clear away that pile of documents and go paperless with Shoeboxed!

Shoeboxed creates clear and comprehensive expense reports that include images of your receipts. In just a few clicks, you can export, share or print the information you need for easy tax preparation or reimbursement.