Starting a Business From an Accountant's Perspective : The Importance of Expense Tracking
Last week we talked about the importance of contracts for small business. This week we are going to continue our series about starting a business from an accountant's perspective by looking at the importance of tracking expenses specific tracking credit card expenses.
Tracking expenses is one of the most important things a small business needs to do. Not only does it allow the business owner to know whether or not the business is profitable but it also is important for making sure the business is taking advantage of every tax deduction possible. Because we live in a digital age, I'm going to assume that every startup's main avenue of making purchases is using a business credit card. So we are going to concentrate on best practices for business credit cards and tracking those expenses.
There are three main things to address with company credit cards.
Whether your business will be directly liable for credit card purchases or if you will just reimburse employees for expenses
How you will track credit card expenses in general and to projects
How to comply with IRS guidelines for record retention for business expenses
Whether your business will be directly liable for credit card purchases or if you will just reimburse employees for expenses?
This is an important question to ask when starting a business. There are three main choices
Open a small business credit card where the business is liable for the expenses on the card and must either pay it off every month or make payments
Or try to set up a corporate card account where the employees get a company-branded credit card but are responsible for the balance and must submit a reimbursement request to pay it off
Or just ask your employees to use their personal credit cards and reimburse them for business expenses they pay
When starting a business I recommend the third option. Allow your employees to make purchases with their personal cards and submit those expense for reimbursement. Then once the business qualifies for a corporate credit card account (normally around 4 million in revenue) switching to a corporate card where the employees still have to submit there expense reports for reimbursement. There are three main reasons for this.
It ensures that business purchases are submitted in a timely manner because employees don't get reimbursed until they submit a report
It ensures that employees aren't making personal purchases which the business is liable for
Timely reporting of expenses means that your financial reports will be closer to real time and therefore more meaningful for decision making.
Though it may be more convenient for you the business owner use to just use the business credit card for purchases which the business will be liable for you need to put processes in place that protect the business and your employees.
So How Do You Go About Tracking Credit Card Expenses?
Most business will probably start with a manual process of keeping receipts and then handing them to a CPA to do their taxes. However, since my recommendation is to reimburse all employees for company expense on their personal card. That isn't going to work. Nor will many business owners be willing to use an excel spreadsheet to track expenses and submit the report to be reimbursed by their business. This is where software steps in. You can use one of my favorite expense reporting software Expensify which allows you to do the following.
Take pictures of, email, or upload your receipts, which it them scans and will auto-categorize if you have it set up
Notify you if you need to make any corrections to your expense categorization or if any expense is missing information
Allows you to split expenses
Allows you to attached expenses to specific projects
Verify that any expense is in line with your companies expense policy
Automatically submit your expenses on a expenses report based on a schedule you setup
Review and approve expense report from your employees easily
Click a button to reimburse approved expense reports while syncing to your accounting software
Using a software like Expensify makes the tracking, submitting, and reimbursement of credit card expenses easy. Giving you easy access to what it cost to run your business and the ability to make better decisions.
Complying with the IRS guidelines expense evidence
The last point I want to hit on is that the IRS requires evidence of all expense that a business claims on their tax return. If you don't have the required evidence then if the IRS audits you they will disallow any expenses that you cannot provide sufficient evidence for. There are two main categories of purchases that require evidence purchases under $50 and purchases of $50.
For items under $50 dollars proof of purchase from a credit card statement should suffice.
However, for purchases over $50 you need a receipt of some sort from the business your made the purchases from detailing what it was for how much and that it was paid for.
Both of these requirements can easily meat by using a software like Expensify. Expensify will automatically create an IRS compliant receipt for any purchases under $50, and they provide you with the ease of taking a photo, forwarding an email, or uploading a receipt for those purchases over $50.
Making sure you track your business expenses is essential to the health and growth of your business. Using a software like Expensify not only saves you time when tracking expenses but provides you the ease of mind knowing that if the IRS asks you do actually have evidence of your expenses.
For more information about expense reporting or how to better track your expense get in touch with us below.