How do I track business expenses for taxes?

The IRS doesn’t care which system you use. It cares that you have one and that it’s consistent. IRS Publication 583 is explicit: small businesses should keep records that show income, expenses, and the basis of property — but it doesn’t prescribe software.

Step 1: Separate your money first.

A business bank account and a business credit card are non-negotiable. They create an automatic, almost-free bookkeeping system: every business expense hits one of those accounts. Once you’ve separated your money, the rest is categorization.

Step 2: Pick one of three systems.

The right choice depends on the size of your business and how much you hate admin work:

• A spreadsheet. Google Sheets or Excel with one row per transaction, columns for date, vendor, amount, category. Free, fast to start, painful at scale. Works fine if you have fewer than ~50 transactions a month.
• An accounting app. Wave, FreshBooks, QuickBooks Self-Employed, or Xero. $10–$30/month. Connects to your bank and credit card and categorizes transactions automatically. Best for most small businesses.
• A bookkeeper. $150–$400/month for a solo bookkeeper doing monthly reconciliation. Worth it once you’re spending more than an hour a month fighting your books.

Step 3: Categorize correctly.

The IRS Schedule C (the form most sole proprietors and single-member LLCs file) has about 20 expense categories. Your software probably maps to these. The big ones to know:

• Advertising.
• Office expenses.
• Supplies.
• Software / subscriptions.
• Vehicle expenses.
• Travel.
• Meals (50% deductible in most cases).
• Professional services (accountant, lawyer, contractor fees).
• Home office (if you qualify — strict square-footage rules).

Step 4: Reconcile monthly.

Once a month, sit down for 30 minutes and:

1. Pull the business bank and credit card statements.
2. Match every transaction to a category.
3. Attach a receipt image for anything over $75 (IRS requirement).
4. Note anything you can’t categorize and ask your accountant.

A monthly 30-minute session saves the year-end 30-hour panic.

What to save and for how long.

The IRS requires 3 years of records minimum, but in practice keep 7 years — that’s the window for an audit on a substantial understatement. Store digital copies in a folder named “Tax Records / YYYY” with subfolders for receipts, statements, and filings.

Common mistakes:

• Mixing personal and business cards. (See above: this is why the separation is step 1.)
• Forgetting to track cash transactions — they still need to be in the books.
• “I’ll do it later.” Later becomes never. The 30-minute monthly session is the whole point.

The cheapest possible system — separate bank account + Google Sheet + one monthly hour — costs nothing and beats the alternative every time.