As a freelancer, you may think that the shoe box method of accounting works well for you, but if you consider all that could be hidden in the shoebox, or worse…missing from the shoebox, you’d agree that using a system to efficiently and easily organize financial transactions is the better way to go.
Having accurate financial records, including income, expenses, asset purchases, taxes charged, income owed by customers and bills you owe to vendors, is vital all year round, but especially at tax time.
Freelancers and home-based business owners have a legal obligation to keep financial records – accurate financial records. “I’m just a freelancer” isn’t much of a defense if tax authorities ask you to justify figures. Furthermore, keeping accurate records will help you keep track of expenses you can claim as deductions.
Documents for Tax Time
The easiest thing to do at tax time is invite your accountant or bookkeeper to use your Flare Cloud Accounting account. They can view and export the financial statements they need to prepare your tax return. Inviting your accountant or bookkeeper is easy. You go to Flare Settings > User Management, add the accountant’s email address, choose the “accountant” role and click “Add”. This role will provide your accountant or bookkeeper access to everything they need.
1) Financial statements
At tax time you’d export or print financial statements including: balance sheet, profit and loss statement (sometimes referred to as an “income statement”), and cash flow statement.
Click Reports in the left menu and export the reports listed above.
2) Tax reports
Your accountant will need to determine how much you must remit to tax authorities. Flare’s sales tax summary and detailed sales tax report will show your accountant or bookkeeper exactly what you charged, what tax credits (if any) you have and the net due for each type of tax.
In Flare’s main menu, you’d click Reports > Sales Tax.
3) Shared expenses receipts or records
We are listing these separately from the rest of your business expenses (which you should also track in Flare) because if you work from home, you may be able to deduct the business-use portion of these home expenses. Whether you rent or own a home, provide your accountant with the square footage of your home and the square footage of space in your home that is used for your business. They’ll use this information and other formulas to determine the portion of home expenses used for business.
If you rent your home, provide receipts for:
- Rental insurance
- Alarm permits
- Alarm fees
If you own your home:
Provide all of the above, but instead of rent or rent insurance documents, provide your accountant with:
- Annual mortgage statement
- Annual property tax assessment
- Home owner insurance records
4) Assets (capital) purchased or sold
Assets are generally not deducted as expenses when they are purchased. Instead, a depreciation expense is deducted each year over the useful lifetime of the asset.
In accountancy, depreciation refers to two aspects of the same concept:
- The decrease in value of assets (fair value depreciation)
- The allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle)
Depreciation is a method of reallocating the cost of a tangible asset over its useful life span of it being in motion. Businesses depreciate long-term assets for both tax and accounting purposes…
Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. – from Wikipedia.
This is a simplified explanation of a complex subject so it’s best to consult an accountant or bookkeeper at tax time. The main thing for you, the freelancer, is to record assets.
Typical depreciation expenses for a freelancer or home-based business owner may include computers, printers, other office equipment and office furnishings.
See the following for more information on depreciation:
- Internal Revenue Service
“A Brief Overview of Depreciation“.
- Canada Revenue Agency
“Claiming capital cost allowance“
Resources for Tax Time
- Read “Year-End Accounting Procedures in Flare. You and Your Accountant Will Love Them“.
- “Deducting Business Expenses” – IRS.
- “Business Expenses” – Canada Revenue Agency.