When Your Expense Categories Aren’t Crystal-Clear

It’s your bookkeeper’s job to help you categorize your expenses so your books are organized and clear come tax time. When you keep up with this (often an undesirable task), you’ll save yourself and your accountant some big headaches and possibly even have a smaller tax bill to boot.

But there are a lot of grey areas in expense categorization that can make everyone’s job just a little more challenging. You see, some business expenses are fine–up to a certain point, or when used a certain way. But that same expense might not be categorized as “business” in other circumstances. It can get confusing and it might feel like you’re splitting hairs.

In general, it’s important to keep an open line of communication between you and your bookkeeper and your bookkeeper and your accountant. But let’s review some general rules of thumb.

• QuickBooks Online will help you categorize your transactions by providing a template at set-up based on what industry you’re in. Use that template.
• You can categorize meals at 100 percent if you take your team out for a teambuilding lunch, but you can only claim 50 percent as a write-off for regular business meals. Make two different categories to track this.
• You can claim travel expenses to and from a business trip as a business expense, but you cannot claim expenses for extra time you stay to sightsee.

Other Ambiguous Expense Categories

Subscriptions – Subscription means different things for different people and businesses. For some, it’s an old-fashioned subscription to a magazine or newspaper. For online businesses, it’s a subscription to web hosting, stock photos and social media scheduling software. Or do you categorize these as software?

Office expenses – Office expenses look a lot different depending on what type of business you’re in. Some industries may put office software in this category, in addition to traditional office supplies. It also may be appropriate to include Facebook ads here, or in a marketing category.

Insurance – Insurance is something that every business owner should have, but we’re talking here about malpractice insurance and liability insurance, not health insurance–which you may or may not be able pay for with business funds.

Benefits of Categorizing Consistently

Keeping tabs on your income and expenses is the best way to ensure you’re spending smart. When everything is in its correct category, you’ll be able to see trends in your spending and how that impacts your income. For example, if you increase your spending in advertising to a specific industry but don’t see a return on that investment, you can make changes to improve the return or redirect your money elsewhere. This is something your bookkeeper can and should be reviewing with you on a regular basis.

Are you getting the feeling that keeping track of your books isn’t quite as straightforward as you thought? It’s true. Your books are a living, breathing part of your business–just like your website and just like you.

Did you catch our post earlier this week? We discussed how to setup QuickBooks Online expense accounts.