While independent business ventures can afford self-directed workers personal and economic freedom, that freedom can also cause individuals to conflate their personal and business expenditures. Even though this practice does not result in itself trigger an IRS audit, it can force you to employ guesstimation tactics when reporting business expenses to the IRS, and this can lead to tax woes and a limited potential for business tax deductions.
Use the following tips to separate business expenses from personal expenses and maximize your business tax deductions.
Just as it is prudent to maintain contemporaneous mileage logs to corroborate your mileage to the IRS, it is also wise to track expenses contemporaneously, or roughly as they occur, rather than impulsively filling in the blanks come tax time. Small expenses, in particular, are not likely to register in your memory unless you register them on paper through either bookkeeping software or a simple spreadsheet. Treat your expense logs as living documents that are updated at regular intervals.
Your financial mindset as much as your behavior can cause you to haphazardly track expenses. Oftentimes, diligent self-directed workers give business expenses the royal treatment in their budget, tracking business accounts payable with precision, but relegating personal expenses into a non-itemized, no-man's land of miscellaneous expenditures that could be no more easily identified than a needle in a haystack. Track personal expenses with the same methodical, entrepreneurial instinct by which you track business expenses.
It can prove difficult to track expenses when your outgoing funds for both personal and business purposes are culled from the same physical pool of funds. Opening a bank account or credit card that is exclusively for business purposes can help you mentally delineate business expenses from personal expenses by diverging a single pool of funds into distinct funding entities that will ensure you never blur the lines between business and personal expenses.
Because self-directed workers often receive payments in more sporadic cycles than regular employees, they are often inclined to dip into their new checks as they receive them. However, this behavior can prevent you from meeting important financial obligations, such as quarterly estimated tax payments.
To remedy this, serve as your own payroll administrator, discerningly allocating a percentage of your income to fund tax payments, monthly bills and your retirement or other savings goals. Knowing that you have put your business and on the path to a sound financial future, you can use the remaining funds to indulge in your success.
To many self-directed workers, the IRS' definition of business expenses may seem like a catch-all for any expense that could conceivably contribute to one's operational goals, however, erring on the side of caution and appropriately classifying business expenses is key. Recording expenses not simply as "business", but with a secondary level of classification like entertainment, supplies or travel can prevent your expense documentation from getting dinged by the IRS.
As you streamline the financial vehicles used to operate your business, MileIQ can help you maximize mileage deductions for business vehicular use. An automatic mileage-tracking app like MileIQ can not only help you isolate personal expenses from business expenses, but it can classify your business mileage with an extensive list of business drive purposes, such as customer visits, meetings, meals and more.