Self-Employed

How to Track Business Expenses for Taxes

To track business expenses for taxes you need, for every expense: the date, who you paid, the amount, a description of what it was, proof that it was actually paid, and a category. Six fields. The record that fails is not the messy one — it is the one missing proof of payment or a description, because those two cannot be reconstructed from a bank line months later. Below: exactly what documents count, the spreadsheet that captures all six, a worked year, and how the totals map onto what you file. (Organisational guidance, not tax advice — your accountant signs off on the return.)

If what you want is the sheet itself, build it in ten minutes from the income and expenses spreadsheet guide. This page is about making those entries hold up as tax records.

What actually counts as proof

The IRS names the supporting documents it expects, and the useful part is that a bank statement alone is generally not one of them — it shows money left, not what it bought:

Whatever the document, it has to show who you paid, how much, when, what for, and that payment actually happened. A photo of a till receipt covers all five. A line on a card statement covers three of them, which is why "I'll just use my statements at year end" quietly costs people deductions they genuinely earned.

The six fields, and the two everyone drops

Add a seventh column if you ever pay for anything partly personal: business use %. A phone bill at 60% business is a defensible entry; the same bill claimed at 100% is the kind of thing that turns a routine question into a wider look.

A worked year

A sole trader's expense log totals $18,430 across the year. Two thirds of the entries are under $50 — and that is the part worth noticing:

The small stuff is 23% of the deduction across 212 entries averaging $20. Nobody skips a $1,200 invoice; everybody skips a $20 one. If half of those went unlogged, that is $2,120 of deduction lost — which at self-employment tax plus a 22% marginal rate is roughly $770 of real money. The discipline that matters is not accuracy on the big items, it is completeness on the small ones.

How the totals map onto what you file

Your category totals become the expense lines of your return. Name them after those lines at setup and year-end is a copy job:

• Advertising, Car & truck, Commissions & fees, Insurance, Legal & professional, Office expense, Rent or lease, Repairs & maintenance, Supplies, Travel, Meals (kept separate — treated differently), Utilities, Other.
• Keep equipment purchases distinguishable from supplies. Durable items may be treated as assets and depreciated rather than expensed in full, and that is decided by what the entry says it was.

Our expense categories guide covers what belongs where, and the deductions checklist covers what qualifies at all.

The receipt system that survives a year

1. One folder per tax year in cloud storage. Not per month, not per vendor — per year, so there is exactly one place to look.
2. Photograph at the point of payment. Filed later means not filed.
3. Name the file YYYY-MM-DD vendor amount so it sorts chronologically and matches your log row without opening it.
4. Paste the link into the log's receipt column immediately. The link is what turns a folder of images into evidence attached to a specific claim.
5. Never delete the original — a digital copy is fine, but keep the source until the retention period is safely past.

On retention: keep employment tax records at least four years, and other records for as long as they may be material to a return — which in practice means several years, and longer for assets, where you need the purchase record for as long as you own the item plus the years after you dispose of it. Confirm the periods that apply to you.

The monthly habit that makes tax time uneventful

1. Log as you pay — 20 seconds, six fields.
2. Once a month, reconcile the log against your bank and card statements. Anything on the statement that is not in the log is a missed deduction; anything in the log that is not on the statement is an error. The method is in the bookkeeping guide.
3. Filter for blanks — =COUNTIF(E:E,"")-1 on the category column and the same on descriptions. Both should read zero.
4. Move the tax set-aside the same day; see how much to set aside.

Common mistakes

• Relying on bank statements as the record. They prove payment, not purpose.
• Skipping anything under $50. In the example above that is 23% of the deduction.
• Mixing personal and business payments in one account, which turns every entry into a judgement call.
• Claiming 100% on part-personal costs instead of recording an honest percentage.
• Leaving descriptions blank — the field that makes the claim explicable.
• Reconstructing in April. The whole point of a contemporaneous record is that it was not written by someone trying to remember.

Related: build the spreadsheet · expense categories · mileage log · quarterly estimated taxes

Part of our system for running small business finances in Google Sheets.

Quick FAQ

How do I keep track of business expenses for taxes?

Log every payment as it happens with six fields — date, vendor, amount, description, category and a link to the receipt — then reconcile the log against your bank and card statements once a month. The monthly reconciliation is what catches the ones you missed, while you can still remember what they were.

What records does the IRS want for business expenses?

Documents showing who you paid, the amount, the date, what it was for, and proof that payment happened: invoices, receipts, credit card receipts and statements, account statements, and cancelled cheques or electronic payment records. A bank statement on its own generally is not enough, because it does not show what was bought.

Do I need receipts for every business expense?

Keep them for everything you can — a phone photo takes seconds and is accepted. Rules on very small cash items vary, but "I could not find the receipt" is a much weaker position than having one, and the small entries are where most of the deduction quietly lives.

Can I use a spreadsheet to track business expenses for taxes?

Yes, and for a solo or micro business it is usually the proportionate tool. What matters is not the software but whether every entry carries the six fields and a link to its proof. A spreadsheet does that as well as anything, and hands your accountant a categorised year without a subscription.

How do I report business expenses on my taxes?

Your category totals become the expense lines on your business return, deducted from business income to give the profit you are taxed on. That is why the categories should be named after those lines from day one — and why your accountant, not a spreadsheet, decides the treatment of anything ambiguous.

How long should I keep expense records?

Employment tax records for at least four years, and other records for as long as they remain material to a return — longer for assets, where you need the purchase documentation for as long as you own the item and for the years after you dispose of it. Cloud storage makes the safe choice cheap.

What if I have expenses that are part business and part personal?

Record the full amount, the business-use percentage, and how you arrived at it. A phone at 60% business, noted at the time with a reason, is a defensible entry. The same cost claimed in full without explanation is the sort of thing that invites a broader look.