What Is A Tax Write-Off? 5 Most Common Write-Offs For Small Businesses

Understanding the ins and outs of tax write-offs is a massive advantage for every business owner. It helps you determine the correct amount of tax owed, and more importantly, what to write off to avoid paying any unnecessary extra money. 

This article will cover what a tax write-off is and the 5 most common tax write-offs that might benefit your business. 

Read on! 

What is a tax write-off? 

A write-off (or a tax reduction) is an expense that you can deduct from total revenue to determine the taxable income for your small business. Essentially, tax write-offs lower your taxable income, which means you will pay less tax. That’s why small business owners always try to write off as many expenses as possible.

However, write-offs must be necessary to a business’s operation and be common in the applicable industry to be qualified, according to the IRS. For example, a tax advisor can write off their business cell phone bill because taking calls helps the business operate smoothly, and it’s a common practice in the tax consulting industry. So, the cell phone expense is qualified to be deducted. 

How do small businesses write off? 

Every business, except for partnerships, needs to file an annual income tax return which will include your business write-offs. All you need to do is visit the IRS website and get the correct income tax form for your business structure. You then fill your tax write-offs in and submit the form! 

It’s also crucial to document your business spending, big or small. Your bookkeeping entries aren’t sufficient. You must keep all receipts and purchase records, whether physical or digital. This will help you stay ready if the IRS knocks at your door. 

If your piles of receipts constantly give you a headache, try Shoeboxed! Shoeboxed is a receipt scanner app that digitizes and extracts important information from your paper receipts automatically in seconds. Every single receipt will be stored and fully searchable in one secure place. Sign up for Shoeboxed to enjoy the paperless world! 

Top 5 common tax write-offs for small businesses 

The good news is most business expenses are either fully or partially deductible. Below, you’ll find a list of the top 5 write-offs commonly available that a small business owner should be aware of for the tax season.

  1. Advertising and promotion expenses

You can fully subtract the cost of advertising and promotion from your taxable income. It can be anything like:

  • Ad fees on Google or social media like Facebook, Instagram, etc.  
  • Printing costs for business cards, brochures, and flyers
  • Payment for designers to make logos, posters, etc. 
  • Software used for marketing purposes
  • Website expenses

Remember though, any expenses spent to influence legislation like lobbying or to sponsor a political campaign can’t be deducted. 

  1. Car and truck expenses 

If you use your vehicle for both business and personal reasons, you can deduct all the business-related expenses from using it.  

There are two ways to calculate your automobile expenses. You can choose whatever option gives you the most tax savings. 

  • Standard mileage rate: With this method, you just need to multiply the number of miles traveled for business by the standard rate, which is now $0.56 per mile. 
  • Actual expense method: This method entails adding up all of your vehicle’s operational costs such as gas, repairs, oil, tires, registration fees, leasing payments, and insurance charges. Multiply them by the percentage of miles you drive for business

Keep in mind that you can’t deduct the miles driven while commuting to work because they are regarded as personal commuting expenses. 

  1. Travel expenses 

A business trip eligible for traveling tax deduction has to be ordinary, necessary, and away from the entire city or area where you operate your business, regardless of where you live (aka tax home). Plus, your travel must be longer than a normal day’s work, requiring you to sleep or rest during the trip. 

The IRS approves some deductible expenses for business travel, including:

  • Travel costs to and from your destination by plane, train, bus, or car
  • Baggage and shipping 
  • Parking and toll fees
  • Cost of transportation during the business trip
  • Accommodation 
  • Dry cleaning and laundry
  • Tips
  • Meals 
  • Other similar ordinary and necessary expenses related to your business travel. (e.g., a rental fee of a hotel business center, hiring an interpreter, etc.)

Again, remember to ask for and keep all the receipts and related documents as they are the foundation for writing expenses off. 

  1. Bank fees

You may be able to deduct annual or monthly service charges, transfer fees, or overdraft fees from your bank or credit card. Also, you may be eligible to deduct transaction and merchant costs paid to third-party payment processors. For example, platforms like Stripe and PayPal fall within this category. 

Keep in mind that any fees directly tied to your personal credit cards or bank accounts aren’t deductible. That’s why it’s best to separate your business bank account from your personal one, as it’s easy to mix things up when you file a tax return and you might end up losing money. 

  1. Education costs

You can fully write off education expenses if they contribute value to your business and advance your expertise. The IRS will look into your classes or courses to decide whether they maintain or improve skills that are compulsory in your current business. If yes, they can be written off completely. 

Below are some examples of education costs: 

  • Courses to improve skills in your field
  • Seminars and webinars
  • Subscriptions to trade or professional publications in your field
  • Books 
  • Workshops 
  • Transportation expenses to and from classes

Any education costs that don’t serve your current career and business wouldn’t be qualified. 

In short, maximize your write-offs 

No one wants to pay Uncle Sam more than necessary. That’s why you really should understand tax write-offs and minimize the amount of income tax you have to pay. Don’t forget to keep good records of every transaction in case the IRS wants to audit you!. 

Get your receipts organized with Shoeboxed

Shoeboxed guarantees that all of your receipts are legibly scanned and accepted by both the Internal Revenue Service and the Canada Revenue Service. Categorized and easy to locate, Shoeboxed is your escape from the stacks of paper documents.

Get 25% off all Shoeboxed plans for a limited time, NOW!

Is Double-Entry Accounting Right for Your Business? Your Complete Guide!

If you’re a freelancer, sole entrepreneur, or independent contractor, you have to decide your business’s accounting system: double-entry or single-entry? You might have been using single-entry accounting, especially if you aren’t using accounting software. While this may have been sufficient initially, you should probably move to use accounting software and double-entry accounting if you plan to grow your business. 

In this article, we’ll walk you through double-entry accounting as simply as possible. We’ll explain how it differs from single-entry, and help you decide which accounting system suits your business best.

What is double-entry accounting?

Double-entry accounting is a bookkeeping method that maintains the balance of a company’s accounts. This method shows the most accurate picture of the company’s finances. At its core, this method relies on the accounting equation Assets = Liabilities + Equity. 

This accounting system was invented by Benedetto Cotrugli, an Italian merchant, in 1458. This system was later shared by the Italian mathematician and Franciscan friar Luca Pacioli, the author of The Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality, which included a detailed description of the double-entry accounting system.

Using double-entry accounting is the only way to make sure all of your transactions follow the accounting equation rules. Unlike single-entry accounting which only requires that you post a transaction into a ledger, double-entry tracks both sides (debit and credit) of each transaction you enter. Using the double-entry accounting system reduces errors and makes it easier to produce accurate financial statements. Later in the article, we will take a look at a real-world example to help make these concepts even more clear.

See more: A Small Business Guide To General Ledgers.

Types of accounts

When you employ double-entry accounting, you will need to use several types of accounts. Some key account types include:

  • Assets: Assets are resources owned by a company, which represent future economic value. Some examples of asset accounts are accounts receivable, cash, and equipment. 
  • Liabilities: Liabilities are amounts owed or committed by a company, such as accounts payable, loans, and accrued expenses. 
  • Equity: Equity is the amount of funds invested in a business by its owners plus all retained income from operations. Common examples of equity are paid-in equity (funds from investors), retained earnings, and common stock. 
  • Revenue: Revenue is the money generated from any operating activities, like product sales, service fees, and interest income. 
  • Expenses: Expenses are all costs incurred in running a business, such as inventory purchases, employee wages, and depreciation. 

What are debits and credits?

Debits and credits are fundamental to the double-entry system. In accounting, a debit entry appears on the left side of an account ledger, while a credit entry appears on the right side. A transaction’s total debits and credits must be equal to be in balance. Credits don’t necessarily imply increasing, and debits don’t always imply decreasing. 

A debit may increase one account while decreasing another. For example, a debit increases asset accounts but decreases liability and equity accounts, supporting the general accounting equation of Assets = Liabilities + Equity. 

Debits increase the balances in expense and loss accounts on the income statement, while credits decrease their balances. Debits decrease revenue and gain account balances, while credits increase their balances.

To make things a bit easier, we’ve made this table to show you how debits and credits work under the double-entry bookkeeping system:

DebitsCredits
– Are always recorded on the left side
– Increase an asset account, or decrease a liability account or equity account (such as owner’s equity).
– Increase an expense account.
– Decrease revenue
– Are always recorded on the right side
– Increase a liability or equity account, or decrease an asset account.
– Decrease an expense account.
– Increase revenue

How double-entry accounting works

Setting up and operating a double-entry accounting system includes four key steps. It starts with setting up the accounts in which bookkeepers will record transactions and ends with using account information to generate financial statements. The steps are: 

  • Stage 1: Create a chart of accounts for posting your financial transactions. This chart is a complete listing of all the general ledger accounts that a company can use to record transactions. It contains all the accounts for each of the five types: assets, liabilities, equity, revenue, and expense. Nowadays, most accounting software comes with pre-made charts of accounts available for customization, while other accounting solutions offer customized charts of accounts.
  • Stage 2: Enter all transactions with equal amounts of debits and credits to reflect the elements of a transaction. Debits and credits can be recorded in any monetary unit, but the currency should be consistent throughout the accounting process.
  • Stage 3: Ensure each entry has two components; debit and credit. And, ensure that they are in balance with the accounting equation. Using accounting software can help you with this. 
  • Stage 4: Check and ensure that financial statements balance and reflect the accounting equation. The net account totals in the double-entry accounting system are fundamental to creating the company’s working and final balance when closing the books at the end of each accounting period. The final adjusted balances flow into financial statement line items. Nowadays, accounting software can automate the integration and process flow necessary to do this.

An example of double-entry accounting

Let’s explore a realistic example of double-entry accounting for a common business transaction. If you buy a new $1000 laptop for your freelance startup and you would like to record the expense, here’s how you’d do it: 

First, you need to enter a $1,000 debit to increase your asset statement “Laptop” expense account and a $1,000 credit to decrease your balance sheet “Cash” account. 

DATEACCOUNTDEBITCREDIT
12/29/21Office equipment$1,000
12/29/21Cash Account$1,000

In double-entry accounting, you still record the $1,000 in your cash account, but you also record that $1,000 as an expense.

Should I use double-entry or single-entry accounting? 

Single-entry might be enough for your accounting needs if your business is very simple, has only one employee, doesn’t have any inventory or debts, and doesn’t have many accounts to keep track of. 

Otherwise, if your business is any more complex than that, most accountants will strongly recommend switching to double-entry accounting.

Why? Though single-entry accounting is simpler to implement, it has significant drawbacks compared with double-entry accounting. Single-entry accounting is more prone to errors, especially omissions and duplications, because it lacks the control method of balancing accounts.

Furthermore, single-entry accounting can’t create a complete financial picture of the business. It only records cash inflows and outflows, indicating when cash is in hand versus when it is actually earned. It also doesn’t indicate items like sales made on credit. Moreover, single-entry accounting requires extra work in the closing process to yield balanced financial statements. Lastly, single-entry accounting is unsuitable for public companies because it’s not accepted under GAAP (Generally Accepted Accounting Principles.)

Double-entry accounting provides you with a more complete, three-dimensional view of your finances than the single-entry method ever could. Since you’re recording where your money is coming from and where it’s going, you can then collate that information into financial statements. This gives you comprehensive insights into the profitability and health of various parts of your business. That’s a win because accurate financial statements can help you make better decisions about spending money in the future.

Double-entry accounting also reduces the risk of bookkeeping errors, improves financial transparency, and provides a layer of accountability to your business that single-entry accounting cannot.

If you want your business to be taken seriously by investors, banks, and potential buyers, you should be using double-entry.

The bottom line

Accounting entries are the foundation of every company’s accounting system. Taking good care of those documents means better control over your expenses. 

Shoeboxed can help you with that! Shoeboxed is a receipt scanning and expense management solution that helps businesses digitize piles of paper receipts in just a few clicks. After scanning your receipts, the app will automatically extract the key data and categorize them in proper order. You can then create clear and comprehensive expense reports, export, share or print all of the information you need for easy tax preparation or reimbursement. 

What’s more, Shoeboxed ensures that all your digitized receipts are human-verified and accepted by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. 
Using Shoeboxed saves you time and hustle collecting and keeping those paper receipts for report-making, especially when it comes to tax preparation. Sign up for free and go paperless with Shoeboxed!

Balance Sheet Explained – A Basic Guide

A balance sheet is one of the three most important financial statements. It provides a crucial insight into how your business is doing financially at a given point in time. This article will take a deep dive into the ins and outs of balance sheets.

Related articles:

Balance sheet explained 

Simply put, a balance sheet displays a business’s assets, liabilities, and owner’s equity at any given point in time. A balance sheet provides an overview of what your business owns, what it owes, and the amount invested by its owners. In other words, it summarizes your business’s worth, so you can better understand its financial position. A balance sheet is also known as a statement of financial position. 

Key components of a balance sheet 

A balance sheet has three main parts: assets, liabilities, and shareholder’s equity. In each part, relevant items are listed and they must match the accounts outlined on your chart of accounts. 

Let’s take a closer look at the three components of a balance sheet:

  1. Assets 

The assets section lists everything your business owns that provides economic benefits. The sub-items are arranged in order of liquidity, or how easily they can be converted to cash. 

The assets section is divided into the two following categories: 

Current Assets: Assets that can be turned into cash within one year. Here are some current assets that companies commonly own:

  • Money in a checking and/or savings account
  • Cash equivalents (currency, stocks, and bonds)
  • Accounts receivable (money customers owe when buying products/services on credit)
  • Short-term investments
  • Prepaid expenses
  • Inventory

Non-Current Assets (Long-Term Assets): assets that will take more than one year to be converted to cash. Some examples of non-current assets are:

  • Land and property 
  • Machinery and equipment 
  • Intellectual assets (copyrights, patents, trademarks, etc.)
  • Goodwill (value from brand name, customer base, reputation, etc.)
  • Long-term investments 
  1. Liabilities 

Following the assets section are liabilities. Your liabilities are everything that you owe to others. Similar to assets, liabilities are also broken down into current and long-term liabilities.

Current liabilities are debts due within a year. Items are listed in order of their due date. Here are some examples:

  • Rent 
  • Utilities
  • Taxes
  • Short-term loans
  • Accounts payable (money owed when buying goods on credit) 
  • Interest payments

Long-term liabilities have due dates longer than one year. For example:

  • Long-term loans
  • Deferred income taxes
  • Pension fund liabilities.
  1. Equity 

Equity is the last section in a balance sheet. It refers to the money owned by the business owners or shareholders. In other words, equity is your net assets. The most common items belonging to this section are:

  • Capital (money put into the business by the owners)
  • Private or public stock
  • Retained earnings (net earnings to reinvest or pay off debts)

The balance sheet golden rule 

A balance sheet must follow a golden rule or an accounting formula as follows:

Assets = Liabilities + Equity

What your business owns always has to be balanced with what it owes plus its equity. This is because your assets either come from your borrowings or your own money. 

What does a balance sheet look like?

Normally, a balance sheet will be divided into two columns: assets on one side and liabilities plus equity on the other. However, it’s not unusual to see a balance sheet looking like a long, endless list. You decide the format most suitable to your business! 

Source: FundNet 
Source: Accounting Guide 

Why is a balance sheet important? 

A balance sheet is an important financial document as it allows you to look at your business’s position in detail. When comparing the current balance sheet to ones in the past, you can analyze and understand your business operations better. Think of it as a regular health check for your company. The balance sheet allows you to make better decisions by giving you an insight into what your business is doing well and what it’s not.

Here are a few financial areas that can be improved by leveraging a balance sheet:

Liquidity 

It’s always challenging for any business to calculate how much cash they have readily available. With the figures on a balance sheet, businesses can work out and analyze critical financial metrics like the current ratio (current assets ÷ current liabilities) or quick ratio ((current assets – inventory) ÷ current liabilities). Interpreting these ratios correctly will help you find the best ways to manage your company’s liquidity.    

Efficiency 

You can determine how efficiently your company uses its assets by comparing your balance sheet with other financial statements. Through calculations and analysis, you’ll be able to determine which areas in the business are generating profits. Then, you can make better plans for future investments or capital allocation.  

Risks

Your balance sheet summarizes how much debt you owe, which can tell you how much financial risk you face. Being aware of your debt situation allows you to make wiser business decisions and avoid potentially damaging events that could lead to bankruptcy. 

Who prepares the balance sheet?

Depending on your business’ size and model, the balance sheet may be prepared by different people. For example, in a small privately-owned business, a bookkeeper will prepare the balance sheet. For a mid-size private firm, their accountants may prepare it first, then have it reviewed by an external accountant. 

Key takeaways 

The balance sheet is an important financial document that you can’t overlook. Understanding what it is, how it works, and how it correlates to the rest of your business are a great advantage for any business owner. 

What’s Shoeboxed?

Shoeboxed is an application that lets you digitize every paper receipt in just a few seconds. Shoeboxed also automatically extracts and categorizes important data from your receipts with human verification

Quick, reliable, and trustworthy, Shoeboxed promises to organize your piles of documents in the best way possible! 
Go paperless for free with Shoeboxed!