Separate Personal and Business Expenses To Yield a Better Tax and Financial Result

There are some things in life that go together well and others that definitely do not! Business and personal finances are in that category of items that should not be mixed. Although it may seem like a headache to keep them separate—who wants to manage all those bank accounts?—your life will be greatly simplified once you separate your personal and your business finances, especially your expenses.

Paperwork and taxes will be easier to manage and you’ll have a better idea of how much money you spend on your business. Here are some tips (and reasons why) to keep your personal and your business expenses separate.

Understand the difference between personal and business expenses

Most times, the line between personal and business expenses is clear. Any expense that is an ordinary and necessary expenditure, something directly linked to your business earnings is a business expense. If you purchase a product, service, piece of equipment or software to be used for your business, it’s a deductible business expense. If you buy something to use privately, that’s a personal expense.

Many times something is considered a “mixed use item”  Something that is used in both your business and  personal life.  Consider a laptop that you use partially for business and partially for personal use; you can only claim a deduction for the amount that you use for business. For example, the laptop used 75 % of the time for business and 25 % of the time for personal, would be categorized as mixed use and you would only deduct 75 % of the laptop when reporting your net profit.

Whether or not you use something entirely or partially for business, it is important to maintain proper records of the purchase.

Open a business credit card and/or bank account

Having a business credit card and/or bank account provides you with an easy way to not only keep your private and business expenses apart, it also gives you an easy way to track your expenses. When you use the same accounts for business and personal use, everything is mixed on the same statement and it can be difficult to determine—or remember—which transactions were related to your business and which were for your private life.  In some cases the IRS may even disallow the expenditure.

With business accounts you know that every transaction is related to your business and should therefore be deductible. You don’t have to search through every statement at tax time to highlight the deductible expenses because every transaction is business related.

You can also easily check your statements to see how much money your business is spending. That’s incredibly difficult to do if your business and personal transactions are all linked to one account.

Where possible, buy separate business items:

Depending on how small your business is, you may not be able to keep all items separate, but buying devices that are used for both business and personal use gets complicated. In an ideal world, you have a separate computer for home and work, a separate work and personal cell phone and even separate vehicles.

Work with your accountant to create a process which enables the maximum business deduction

In many cases, depending on your business entity type, titling the asset incorrectly and paying for the expense via your personal bank account or credit card may actually create a non-deductible business expense. Working directly with your accountant to understand and set up the proper procedures to pay for and account for those costs will save you time and taxes. This is especially true for your car, cell phone, and office in your home.  Best practices dictate keeping your personal life expenditures separate from your business life expenditures, and of course when in doubt, contact your accountant for guidance.

Final thoughts

Business Expense Allocation
Business Expense Review

It can be tempting to try to write everything off as a business expense but don’t fall into that trap, you may actually be costing yourself more in taxes by not following the correct procedures. Always open separate accounts, buy duplicate items where necessary and keep receipts of your business expenditures.

If you’re unsure, schedule an appointment with us to find out which activities count as a tax deduction and which do not. We can:

  • answer your specific questions
  • ask you questions which highlight potential problem areas
  • help you create a process for your business to follow to properly track expenses
  • set up an accountable plan
  • evaluate your business entity
  • discuss your business challenges or successes

Our team continues learning new skills and reviews opportunities for tax saving strategies under the new law, the TCJA to bring added value to our client meetings, and we’ve been doing this for over 25 years.

If you need help with your accounting, want to create a tax minimization plan, want to discuss your business growth plan or your finances, are concerned about retirement goals or need to be held accountable for your 90 day action plan, contact us for a complimentary discovery session or an appointment to just get started.

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