Bottom Line

You can track business expenses yourself with a separate bank account, one place to log every cost, a category for each expense, proof for each entry, and a short review every month. An accountant helps with tax decisions, but no accountant can rebuild records that were never kept. This guide is general information and not tax advice, so check your own situation with a tax professional.

How do you track business expenses as a sole proprietor?

Follow six steps and the habit takes only a few minutes a week. Step one is to open a separate business checking account. IRS Publication 583 advises opening one early, keeping it apart from personal checking, depositing business receipts into it, and avoiding checks written to cash. Step two is to pick one place to log every expense, and a spreadsheet is enough to start. Give it columns for the date, the vendor, the amount, the category, how you paid, what the expense was for, and where the receipt is saved. Step three is to give every expense a category, such as advertising, car and truck, insurance, office expense, supplies, software, travel, meals, and utilities, so the totals are ready when you prepare your return. The Freelance Business Expense Tracker sorts entries into Schedule C expense categories. Step four is to keep proof of each expense. IRS Publication 583 says your records should show the amount paid and that it was for business, and it lists canceled checks, account statements, credit card slips, invoices, and receipts as proof. A bank statement can show payment, but the publication notes that proof of payment alone does not establish a deduction, so keep the invoice or sales slip too. A phone photo of each receipt saved in a monthly folder works well. Step five is to log mileage if you drive for work by writing down the date, the miles, and the business reason for each trip. The IRS sets the standard mileage rate and changes it, so look up the rate for your trip date on the IRS standard mileage rates page. Step six is to review every month. Compare your log to your bank and card statements, add anything missing, and total each category. IRS Publication 583 recommends reconciling the business account monthly.

How long should you keep business expense records?

Keep them for as long as they may matter for a tax return. The IRS says the general period is three years if you owe additional tax, and longer periods apply in some situations, so ask a tax professional how long to keep yours.

How much of a business meal can you deduct?

Generally only 50 percent of the unreimbursed cost of meals, according to IRS Publication 463, so give meals their own category in your log.

Do you need accounting software to track expenses?

Not to get started. A spreadsheet handles a sole proprietor with a modest number of transactions, and software becomes useful when the number of entries grows or you want automatic bank feeds.

What mistakes make expense tracking fall apart?

The common ones are mixing personal and business spending, logging in big batches months later, skipping categories, throwing away receipts, and forgetting cash purchases. Logging each expense the day it happens avoids most of them.