4 Best Practices to Separate Business vs Personal Expenses
Posted by Rosalind Joseph on Thu, Jul 29, 2010 @ 10:00 AM
Some business owners view their business as an extension of themselves, which can create an environment for mixing of business and personal finances. Once the boundaries are crossed and overlapped, it can be a headache trying to separate the two, especially at tax time.
The IRS views a business expense as a cost of carrying on a trade or business, which is deductible if the business is operated to make a profit. In addition, a business expense must be ordinary and necessary in order to deduct it. As you cannot deduct personal and living expenses, you want to make certain you do not have personal expenses flowing through your business – it becomes difficult trying to convince the IRS which expenses are for the business and which are your personal expenses.
It is not uncommon for a new business owner to start a business with personal funds. However, you need to make sure you keep your business transactions separate from your personal transactions. You also need to keep track of whatever personal money you put into the business. You don’t want to count a personal loan as income, ultimately paying taxes on it. The following are four best practices to help keep your business expenses separate from your personal expenses:
- Open a business bank account and business credit card or line of credit.
- Loan the business a set amount of money and use it to make business purchases
- Keep track of business expenses paid out of pocket and reimburse yourself. You can create an expense reimbursement form which lists all expenses for which you are being reimbursed. Attach receipts to the expense report as back-up for substantiation.
- Take a monthly draw or salary to cover your personal expenses. Depending on how your business is structured (corporation, s-corporation, etc.), you may be required to take a salary.
Keeping your business finances separate from your personal finances will keep you straight at tax time.