Improperly Categorizing Expenses

Don’t Be a Vampire of Your Own Business

When you are trying to keep up with your business, you want to make sure that you have all of your business expenses in order as well as income. There are some problems that can come along with your expenses, however. Did you know that you could be losing money based on misidentifying the types of expenses that your business is accruing?

Improper Categorization Impacts Your Bottom Line

Correct expense classification is not only crucial when it comes to tax time. Without a good system, the net profit numbers you look at regularly will be off the mark – giving you an inaccurate picture of the health of your business.

  • Did you put the costs for that consultant you hired under regular employee expenses? If so, your accounting system will tack on standard employment taxes rather than the lower 1099 contractor taxes.
  • What about the windows in your office building that had to be replaced? Ongoing repairs and maintenance are taxed differently than capital improvements that can be amortized over time.

These are just two examples of how expense categorization makes an impact on your bottom line.

How Can Expense Categorization Mistakes Occur?

Many times, business owners don’t find out about expense mistakes until they are getting affordable tax prep services and it is pointed out to them. There are a handful of reasons why this can happen.

  • Typing Errors. This is the most common problem. Whether you’re mistyping the cost or you forget one of the numbers in your expense code, typos can cause expenses to end up in the wrong category.
  • A Lack of Understanding Regarding Expense Types. Does everyone understand the categories you have put together? If people are putting in information on your expense sheets, but they don’t really get what these categories mean, it may come back to bite you.
  • Not Categorizing Your Expenses at All. One big mistake that some people make is that they don’t even try to categorize – they just use one big “expense” bucket. Sooner or later you’ll have to pay for this, either with your own time or paying out extra to whoever does your tax services.

How Can You Prevent These Problems?

If you are miscategorizing your expenses, you are, essentially, sucking the life out of your business. What can you do, then? There are several ways that you can prevent these problems from becoming a bigger issue in the future. Here are a few tips that you can try.

  • Talk to a Professional. The best way to deal with business expenses as they relate to your tax services is to talk to a professional. Our office in Nampa, ID can help you with these sorts of problems and give you some tips on preventing and correcting them.
  • Re-evaluate your Expense Categories Regularly. As businesses grow and change, so do expenses. After completing your regular net profit calculations, take another look at costs with a focus solely on expense categories (not how much money you made).
  • Always Double Check Your Work. If you check your typing after you do it, you can prevent clerical errors from causing even bigger problems. Remember the old adage … garbage in, garbage out.

If you need more information or you’re looking for Affordable Tax Prep in Nampa, ID, then don’t hesitate to contact us. We want to help you to get the help that you need and prevent you from missing out on money that you could be getting back in your tax returns.

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