Did you know that there are more than 28 million small business owners in the United States? Or that 22 million of them are non-employers, which means they are self-employed without any additional employees?
While self-employment comes with many perks, like working from home, tax time proves stressful. Why?
Because of the very thing designed to help small business owners out: itemized deductions.
If you find yourself sitting in a pile of receipts attempting to piece together the past year, you’re not alone. Fortunately, there is a better way.
While you might have missed your window to track expenses for small business in 2018, you can start with a clean slate in 2019. Ready to learn how to track business expenses with a credit card?
Read on for a 100% fool-proof method.
Make Next Year’s Tax Filing Easier with a Credit Card
When you start a new business, it might feel easy to keep track of all your transactions and itemized deductions. Especially when there aren’t a lot of transactions happening.
But before you know it, you’ll find yourself knee-deep in a pile of receipts. (On the bright side, at least you have the receipts.) But you also have an accounting nightmare on your hands.
Piecing the stories those receipts tell back together can prove difficult, especially during the malaise of filing self-employment or small business taxes.
So, how can a business credit card help you take some of the stress out of this all too common situation? It provides a surefire means for keeping track of all your business expenses.
Just make sure you dedicate one card and one card alone to business expenses. (Find out more about selecting the best-secured credit card here.)
Mixing your personal and professional accounts can wreak havoc on your life. It can also muddy the waters when it comes to itemized deductions.
Small Business Deductions Worth Taking
The whole concept of itemized deductions can feel overwhelming. You may find yourself asking whether it’s worth all the trouble that you’re going to, to take these deductions. And that’s a valid question.
Deductible business expenses can help small business owners and entrepreneurs with the expenses associated with running a business. And, yes, you can save BIG come tax time. But you’ve got to have the paper trail to prove it.
What types of deductions do small business owners actually take? Itemized deductions include:
- Salaries and wages
- Car and truck expenses
- Contract labor
- Home office
- And more
Of course, keeping track of all these expenses throughout the year can get difficult. And if you happen to be one of the poor, unfortunate souls who have mixed personal and business finances, then it can get really complicated.
This means tax time involves wading through long lists of expenses searching for business-related costs that are deductible. This can turn into a messy process, especially if you find you’re missing some receipts.
Using a Dedicated Personal Credit Card for Business Expenses
Whether you opt for a business or personal credit card, you need to keep all your business expenses on one card, separate from your personal expenses. Period.
This will save you lots of time as well as help you stay out of the crosshairs of the IRS.
Should you choose to go with a business credit card, know that this account will not come with the same protections enumerated by the CARD Act of 2009. That’s why some business owners prefer sticking with a dedicated personal credit card.
With a dedicated personal credit card, you won’t have to worry about things like your monthly credit card due date changing or having an introductory APR revoked before six months have passed.
Here are some factors to consider before choosing a personal credit card for your business needs.
Using a Business Credit Card for Business Expenses
That said, if you do your research well, you may find a business credit card with rewards attuned to your business needs. In this case, you should consider a business credit card.
For example, the Bank of America Business Advantage Cash Rewards Mastercard comes with three percent cash back on purchases at gas stations and office supply stores.
This might pay off big depending on how often you need to restock office supplies. So, do a little research before you make the final decision between a personal credit card account or a business credit card account.
Check out these great offers to learn more about the best credit cards with perks in 2019.
Your New Best Friend: Transaction Categorization
No matter which type of account you choose, make sure you find a credit card that offers transaction categorization. Trust us, it’s about to become your new best friend, especially during tax season.
How does transaction categorization take some of the pain out of doing your small business taxes? It represents a means for tracking and organizing expenses.
In fact, transaction categorization allows you to label a wide variety of expenses using predetermined labels such as:
- Car rentals
- Medical expenses
- And more
Some cards even allow you to create your own personalized transaction categories, which streamline tax preparation even further.
Credit Card Reporting Features: How to Track Business Expenses
Besides transaction categorization, you’ll gain access to a variety of reporting features including quarterly summaries and year-end summaries. These can prove invaluable when filing taxes.
What’s more, with some cards, such as the Capital One Spark Cash for Business card, you can take it a step further by creating itemized reports of your business spending customized to your specific needs. It doesn’t get any easier than that.
What’s more, the card boasts a two percent cash back on all purchases.
The valuable information that you gain access to with a card like the Capital One Spark Cash for Business card will also help with other aspects of your business, such as creating budgets and planning for future business growth and expenses.
Instant Business Financing at Your Fingertips
When you start your own business, you may have initial trouble with cash flow. As a result, you may find yourself financing the business out of pocket. This can get tricky, particularly for you and your accountant, when later itemizing deductions.
Instead of looking to a small business loan to finance your enterprise at the beginning, consider doing so with a business credit card. A business credit card will provide you with more purchasing power beyond your personal credit cards.
What’s more, you may be able to secure interest-free financing to get your fledgling enterprise off the ground. Look for a credit card like the Chase Ink Business Cash, which offers 12 months at 0 percent interest on purchases and balance transfers.
That said, be careful about carrying a balance. Even though you’re opening a card in the name of your business, you’ll still be left personally responsible for any debts accrued whether or not your business succeeds.
Is It Ever Okay to Mix Personal and Business Finances?
This is a question that we get asked often. And there is no clear-cut answer. It all depends on the context and extenuating circumstances.
For example, you may earn major rewards by purchasing your kids’ back-to-school supplies on a business credit card that offers cash back for purchases at office supply stores.
But you must keep these expenses separated out from all your office supply expenses for your business.
In fact, any time that you mix personal and business expenses, you stand to complicate your business accounting efforts. So, only do so if you are organized and meticulous enough to keep these expenses separated from actual business costs.
What About Paying Taxes with a Credit Card?
Here’s another question that we get asked often, “Is it okay to pay taxes with a credit card?” Again, it depends on the potential credit card fees as well as your situation.
Your financial well-being depends on using your credit cards in responsible ways. That said, it isn’t necessarily an irresponsible idea to charge taxes to your credit card, especially if you have the potential of earning points or rewards.
But you must recognize up front that no matter your ultimate goal, you will pay for using a credit card.
Some business owners may find themselves cash poor around tax time. If such is the case, you’ll need to weigh the costs of late fees to the IRS against the fees associated with paying your taxes via plastic.
After all, the IRS has set agreements with approved credit card companies. These agreements go so far as to set predetermined fees for different vendors. Here’s the IRS’s handy-dandy list of vendors and fees.
You also have the option of using a credit card should you go through a tax preparation service such as H&R Block or TurboTax. That said, you’ll pay for the convenience.
How much? Fees can range from 2.49 percent from TurboTax to as high as 3.93 percent for other services.
The Deal with Paying Taxes by Credit Card
If you’re a points or rewards junkie, you may see benefits from paying your taxes with your credit card. If you have a credit card with excellent rewards, you could rack up enough points to make the IRS’s set fees worth it.
But the trick here remains to earn more value in rewards than you’re paying in processing fees. In other words, it’s a balancing act.
The same goes for rewards bonuses. Do you have a certain threshold you need to meet to see rewards? Then, paying your taxes with a swipe of the card could work out to your benefit.
Finally, you may need more time to pay off your business’s tax debt. If that’s the case, a credit card could let you spread out the payments over time. But you should only use a card with a zero percent interest rate.
Although using a credit card makes sense for paying your tax debt in all these cases, keep in mind the fact that you don’t want to get in the habit of carrying debt.
Make sure you pay off your debt in a timely fashion. Especially if the account proves constrained by an introductory APR period.
Paying your taxes with a credit card will also make it easier to find and deduct these expenses next year. That said, using plastic to pay taxes doesn’t generally work to your benefit.
When Not to Use Your Card
While situations exist where using a credit card to pay off tax debt makes sense, there are many more where it proves a bad idea. For example, don’t do it if the fees outweigh the rewards you hope to receive.
What’s more, if you won’t be able to pay off the balance of your card right away, then you should avoid plastic. It’s actually better to enter into an installment plan with the IRS. After all, you’ll have 120 days to pay off your bill interest-free.
Finally, anytime that you carry debt on your credit card, you increase your credit card utilization ratio. This spells trouble for your credit score. To avoid a nasty hit to your numbers, always keep your credit card utilization ratio below 30 percent.
No matter what, the bottom line remains. If you have the cash, avoid using plastic to pay the IRS. And don’t be afraid to set up an installment plan with the IRS.
Just don’t ignore the IRS. Assessed penalties and late fees can add up quickly when you don’t pay at all.
Take the Hassle Out of Tax Time
When you start a small business, you suddenly get pummeled with hundreds of different responsibilities, not least of which are accounting needs.
You probably didn’t start your business to spend so much time tracking expenses, so this can feel frustrating and confusing. Especially when it comes to the convoluted tax code.
Fortunately, when you use a dedicated credit card to track business expenses throughout the year, you cut out much of the hassle and confusion.
Ready to learn more about business credit cards? Read our complete guide to getting a small business credit card.