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My question is in two parts: (1) I am swimming in all kinds of receipts and after at least 5+ years of working as a freelancer and this is not good for my taxation.

It has been easy to state at the beginning of a contract that I will mark business expenses however in practise I am losing this battle and it seems to be overwhelming.

How should I track receipts and expenses so that they do not take all my time, I am a full time parent as well and I cannot simply keep up. Do I have to hire extra help?

(2) I have been told time and time again what I can bill and what I cannot bill on my business expenses, however as a freelancer everything I do is because of my business. I know in the UK/Euro region, where I mostly do my contracting, this is an issue for most people too so what methods have the experts learnt that they can recommend so that this task does not become as daunting as it usually has been when I have to file my taxes.

I recently (8 months ago) installed a Google App Wave Accounting yet I have failed miserably to make practical steps to understand and be motivated to do it! I don't seem to be able to make the time. So now I am asking the community, from your experience, how can I beat the 'receipts and expenses' blues...

Higher reputation members can also improve the tags if you see fit adding 'receipts' and 'organising'.

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    I don't know how things are in your country, but accountants usually don't charge much for consulting, so I suggest you hire one and save yourself the headache. Accounting and taxes are just too much of a pain and the potential consequences of not making a mistake are quite high. You should focus on your core business (freelancing) instead. – Dzhuneyt Jun 11 '13 at 14:00
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I am going to go over some basics of expense categorization with a UK flavor. The same applies generally elsewhere. Note that your second question, what can or cannot be claimed as deductions on taxes is something that is quite subject to change, and basically you can loosely follow accounting sites and talk with a tax accountant once a year to make sure.

Also regarding time commitments of being a parent, I totally understand (I have three kids).

Chart of Accounts Setup

The chart of accounts is basically a system for categorizing income, expense, cash, obligations, etc.

This is a critical task but it only needs to be done once. You will want to hire an accountant to help you with it, but since it is your business you should understand at least the basics of what is going on.

Questions like this are one reason I recommend that all freelancers have basic familiarity with accounting and bookkeeping practices. You will probably want to hire an accountant for additional advice through this process of setting up your books, but you can do your books by yourself once things are set up. If you get a decent double entry accounting program, you should be able to do most of what you need just through entering vendor and sales invoices, so I don't see a major reason to hire someone to do this on an ongoing basis (aside from tax preparation) since you probably would want to be in the loop anyway.

In general though in most places and times expenses necessary to realize revenue may be deducted. Without such a rule, mapping financial accounting to tax accounting ends up being a real mess. There are some exceptions in most places though so this is a place to get some advice (for example in the US, iirc and I am not a CPA, if you claim real costs for meals while travelling on business, you can only deduct half of the cost there on the theory that otherwise you would have had to eat non-deductable food anyway). This is something to talk with an accountant about.

Most countries have some sort of recognized categorization of expenses in income tax reporting, and this is generally where to start. Some countries, like Canada, formalize this under a system like GIFI (Generalized Index of Financial Information), but even where this is not formalized as such usually tax forms will have some categorization of expenses you are expected to report to, so you want to start by looking at tax forms. If you have an accounting system that supports GIFI (LedgerSMB does), you can set up your codes to match tax reporting categories and this simplifies things a bit even if your country does not use GIFI as such (neither the UK nor the US do). Don't worry about this too much. Just look at the tax forms and see if there are any requirements for breaking things down. Actually setting up GIFI codes is an optional step but it simplifies tax reporting and lends some clarity to the process.

Once you have a good idea of where these are, and any exceptions to the all business expenses general view, then you can set up your "Chart of Accounts." A chart of accounts has basically two parts and five major divisions. The first part tracks operational resources and commitments (assets and liabilities) and the second part tracks owners' interests (income, expense, and equity). We are focusing here on expense reporting. Expenses represent a decrease in your ownership of the business through routine operations. You want to track these based on two criteria:

  1. How do these map to tax reporting categories? You want to avoid accounts which cross tax reporting categories generally. It is easier to fill out a tax form by adding the totals from two accounts than it is to go through one account to figure out what goes in which category.

  2. Is there anything that must be tracked relative to everything in an income account (this is a question to ask your accountant if you don't already know the answer)?

In general getting the chart of accounts setup right will save you a lot of work going forward. One thing I will note is that the more financially knowledgeable my colleagues and clients are, the more likely they are to get accountants involved in this process at this stage.

Best Bookkeeping Practices

Once your chart of accounts is set up, you have your basic categories set up, and a decent piece of accounting software installed, you can categorize your receipts quick and easily. This is mostly basic data entry but some importance to detail is important. A typical way to do this is to have two folders for the current year (and one for each prior year where you are saving receipts). Receipts go into one folder, and get moved to the other once entered into the accounting software. I like to try to do this once per day. It usually only takes a couple minutes. Fire up the software, enter the receipts, close it.

When entering receipts there are a couple of practices I like to recommend that will save you a lot of headache. The first is you want to to enter and track the invoice number from each receipt (the UK I believe has a requirement for invoices to be uniquely numbered). In the event you are travelling somewhere without such a requirement and you get an invoice without such a number, you want to have a convention that allows you to go from the computer record back to the original receipt in the event of an audit. Something like M (for manually generated)-YYYY-MM-DD (representing the date) is not a bad idea. However write this on the back of the receipt so you have record of what the number was.

Like so much else, keeping the time minimal in this is mostly about set-up (get the help of an accountant here), and about routine. If you get these taken care of, tracking receipts should not take significant time.

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Generally, everything can be tax cost, or cannot be, depending on actual situation. So the list of things that can be cost would never exist. There could be only a particular cases for particular country. For example, washing machine would be a cost for agrotouristic company, would not be a cost for translator.

How should you now if expense X can be cost? Most of people hire an accountant for that. The most important in accountant's job is not to simply type data into program in correct way, but to know the interpretations about the tax costs. Note, that your interpretation in completely irrelevant, important is only, how financial office would interpret your case.

Second possibility is to ask in internet. But you must always ask very precise question. You must write where you are registered, where you are contracting, what exactly have you purchased and where (inland/foreign expense) and describe in details your business activity. And you must take into account, that the answers that you find could be wrong or simply not adequate to your situation (because you've forgotten to write some tiny details), which could result in prosecution in case of audit.

Note also, that many legal system states explicitly, that in case of self-employment, an expense that is partially used for personal needs cannot be considered tax cost. So it might be so, that a car would be considered tax cost if you use it to commute to work, but if you also drive once a week to the supermarket, it would be personal use and the car could not be classified as expense.

Summarizing, if you have a lot of expenses, you should hire an accountant.

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Part (1) sounds like a request for practical help on organizing and collating expense receipts.

I'm assuming you have a competent small-business-friendly accountant/service - if not, go find recommendations and get one quick (at least as a one-off till that gets you unstuck). That's probably a deductible expense btw. Obviously you want to figure out way in advance which expenses are/are not allowable and will need to be tracked - this is basic stuff so join some contractor webinars/mailing-list/organization. Surely there are some for Finland. Any quality accounting service mails out super-helpful year-end/tax-time tips/newsletters on this sort of stuff. Go ask them for last year's.

Some how-to tips on expense tracking I got which my friend and I both found useful:

  • use an expense diary/tracker. In particular there are some great mobile apps out there for this, preferably one that plays nicely with your calendar app. Some even scan receipts (or else you can manually enter item,amount,category,client/project ID,notes, or extract those from your statements). In particular, Cashbook is only US$6 (freemium) and is truly outstanding. Look for ones with five-star reviews and the capabilities you need.
  • if Google Wave Apps or any other app doesn't suit your needs (Receipts beta is only 3 stars/5) or is hard to use, then don't use it, already. There are hundreds more out there. You can always use a different Receipts app with the rest of Wave. I have no idea whether Wave is good - Quicken is. What are your specific top-five issues with Wave? Figure out what you need out of your expenses app then compare reviews and try apps out till you find the right one. Multi-currency? Configurable exchange rates? Multi-project? Customizable categories and subcategories? Receipt scanning? Summaries, graphing for arbitrary time period? Invoice format and generation? etc etc.
  • 8 months is insanely too long to trial an app. I give them 7 days max. Uninstall, already. Just because the product is called Google (or Microsoft, or whatever) doesn't mean it's necessarily any good. Be discerning.
  • absolutely open a separate business account, with a separate business credit card, then use that for anything expenseable to the business. This keeps your statements separate and clean, also means you can easily see totals and track stuff down. Then you can access your accounts via downloadable/online PDF/CSV/XLS/Quicken/etc statements. Do this for travel, meals, capital expenditure etc. A lot of banks/personal finance apps these days automatically break those items out into categories - that's good as a first cut.
  • if nothing else, gather your receipts and do them at the airport/hotel/plane/train/the next business day after you return from each trip. Fix a time on your schedule for trip reporting or invoicing if necessary. Figure out what works for you and your schedule.

This is mostly forward-looking advice (but do get started! end the pain immediately!). For the prior five years, you're just going to have to go through bank statements, maybe some electronic records (find out which ones you can request) or year-end rollups, sort receipts into the proverbial shoebox for each year and/or client), type up a spreadsheet. Maybe hire a smart kid to help alongside (as a once-off) you because that stuff is tedious and annoying.

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I have to admit that I'm in a very similar boat to you and am still fighting to gain control over the receipts. One service that I have signed up to that has been invaluable in this regard is Receipt Bank. They actually go as far as scanning and categorising all your receipts for you so that you don't have to go through all of that yourself. They simply send you an envelope, which you fill with receipts and send back to them. A couple of days later they ping you an email to let you know that your receipts have all been scanned and you can sign in and download (or whatever else you need to do with) the electronic versions. They also provide integration with other systems, including Free Agent, which I use for my accounting. If you pay the annual fee up front, they'll even let you send all of your old receipts in one go.

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