Time to talk about spreadsheets again… Last time, I told you about the simple ‘sheet I use to track my annual freelance income. This time, I’m going to focus on the spreadsheet where I track my business deductions.
Before I jump into that, though, let me publicly invite all Worders who have more advanced spreadsheet skills than I to jump write in, in the comments, with tips and tricks related to the ‘sheets I’m discussing. I might not choose to adopt those tweaks, but others likely will, and the more knowledge we share, the better for everyone!
(And this is the perfect place for me to tell you that I’m not providing you with legal or accounting advice for your particular situation, that everything I say below is provided by way of illustration and is not meant to be applicable to your specific legal or financial situation.)
So. Let’s get down to brass tacks. Federal income tacks. (I’m only addressing US tax requirements, because that’s all I’ve studied. I suspect these points can easily be tweaked for those of you in other jurisdictions.)
I routinely save all of my business receipts, placing them unsorted in the last folder of a large accordion file. Once every quarter, I go through the accumulated receipts and record them in my deduction spreadsheet. After I record each receipt, I place it in the proper folder of the accordion file. (I have a separate folder for each category listed below, so that my paper filing system parallels my electronic filing system.) At the end of each year, I collect all the receipts from the folder, put them in a giant envelope and save them, in case the IRS ever wants backup. Then, my accordion file is ready to be used again.
Each year, I also create a spreadsheet with multiple pages. I use it to calculate my quarterly tax payments, and to determine my overall tax due. I use TurboTax to do my filings, so my deductions are grouped into categories that the software likes (which are taken, in turn, from the categories in the Tax Code).
Each page of my spreadsheet has the following columns:
DATE – DESCRIPTION – AMOUNT – NOTES
Date is self-explanatory.
Description is what I spent money on (e.g., “postage” or “air travel” or “convention membership”).
Amount is self-explanatory.
Notes is anything that I think the IRS might want to know, or that I might want to remember – who received the package I mailed, what was my destination, which convention did I attend. Sometimes, I remind myself that one calculation (such as my electricity bill) is complete through the middle of June, and another (such as my water bill) is current through year-end. You get the idea.
I build a page for each major category of deduction:
Advertising (descriptions include Association memberships, Electronic, and Print)
Communication (descriptions include Cell phone, Internet, and Landline)
Gifts to charity (descriptions include Cash and Gifts in kind)
Home office (descriptions include Insurance, Real estate tax, and Utilities)
Legal and professional services
Meals and entertainment (descriptions include Breakfast, Dinner, Lunch, Meeting, and Per diem rate)
Medical expenses (descriptions include Co-pay, Dentist, Doctor services, Laboratory, and Pharmaceuticals)
Repairs and maintenance
Supplies (descriptions include Books, Computer hardware, Computer software, Office supplies, and Postage)
Taxes and licenses (descriptions include Business license tax, Business tangible property tax, and D.C. Bar dues)
Taxes we paid (descriptions include Federal tax quarterly, Foreign tax, Personal property tax, and State tax quarterly)
Travel (descriptions include Air travel, Automobile parking, Automobile travel, Hotel, Public transportation, Taxi travel, Tips, and Train travel)
There are also a lot of deduction categories I don’t use. I keep empty pages for them, in case my needs change during the year. Right now, I don’t use the following categories: Assets (Depreciation), Contract labor, Insurance payments, Interest payments, Inventory (Cost of goods sold), Other office expenses, Rental payments, Utilities for business office, and Vehicles.
Come tax time, I sort and subtotal each page, using Excel’s functions. Ultimately, I end up with a single number (the Grand Total) on each page that gets entered on a line for my tax form.
The tax code is … somewhat obscure about the appropriate category for some deductions. (For example, when I buy a book for research purposes, is that a “supply”? Or is it a “miscellaneous expense”?) My goal is to have a reasonable explanation for each decision I make (one that passes the “red-face” test – can I share it with an auditor without blushing), and then to make that decision consistently from month to month and year to year.
So. That’s the basic framework. There are lots of twists and turns, and lots of specific things that I choose to list one way, where I know other authors list them in other ways.
Did I lose you, way back at the top? I’m sure you have questions. Fire away!