Tracking business expenses accurately is critical for tax compliance and business insights. Here’s how to make sure you’re getting the process right.
Your personal time will overlap with your business time, but your personal and business expenses should never mingle.
Set up separate business accounts.
Be diligent about using the right account for the right expenses.
If you must use personal accounts for business expenses, be sure to track them accurately.
Devote regular time to bookkeeping
Pay yourself in an organized fashion.
Make a plan to deal with overlapping expenses.
Set up an accounting system and get help from experts as needed.
When you own your own business, your personal time almost always overlaps with your work time. You will inevitably find yourself working from home late into the night, delivering your pitch at social events, or taking care of personal needs while at work. Your personal and business time will bleed together, but you need to be a little more careful with your business finances.
Separating personal and business finances can be tricky, especially when you’re trying to get your company off the ground and pouring everything you have into it. This guide explains why you need to do it, plus explores some best practices.
The importance of splitting personal and business expenses
You need to be able to differentiate your personal and business finances for tax purposes. Here are some of the key points you should know:
You are legally obligated to report all your business revenue to the Internal Revenue Service (IRS) and state tax agencies.
You are allowed to deduct your business expenses from that income, however.
Failure to track your business expenses can lead to a higher-than-necessary tax burden.
If you write off your personal expenses as business ones, you’re breaking federal law and may face civil or criminal tax evasion charges.
You also need accurate financial records so that you can track your company’s success and attract investors or lenders. If you’re mingling business and personal expenses, you’ll lose out on these insights.
Here are some steps you can take to make sure you keep your personal and business finances separated.
Set up separate accounts
Any easy way to simplify the process of separating personal and business expenses is to set up separate accounts for personal and business use. Then, use them consistently. Only run business-related expenses through your business account and avoid using your personal one for business purchases.
Carefully track owner contributions
In some cases, it may seem impossible to only use a business account for business expenses. Say that you are facing an unexpected repair on a piece of company equipment and you don’t have enough money in your business account to cover the bill. If you’re like most business owners, you’re going to grab your personal credit card or go into your savings account. You have to spend money to make money, after all.
You need to handle these scenarios carefully to ensure your expenses don’t get muddled together, and the right bookkeeping approach is critical. You’re adding owner’s equity every time you add money to your business from your personal accounts, and you need to record that. You also need to remember to claim it as a business deduction on your tax return.
Commit to regular bookkeeping
When you’re busy trying to get a business off the ground, it can be very tempting to push “non-essential” activities to the back burner. Bookkeeping can feel very non-essentially as you’re pitching new clients, closing deals, and negotiating with vendors. You may tell yourself, “I’m just going to use my personal card this one time and I’ll deal with the records later,” or “I’ll remember these expenses at tax time.”
If you’ve ever had thoughts like that, you are not alone. But the truth is — handling personal and business expenses like this will certainly lead to errors. You need to commit to tracking your expenses. Sit down on a monthly, weekly, or even daily basis – depending on the number of transactions your company handles – and write down your income and expenses. You can do this with a bookkeeping program or just using a spreadsheet. You may want to outsource your bookkeeping to an expert as the numbers become more complicated.
Pay yourself on a regular schedule
In addition to paying for business expenses out of your personal funds, you may find yourself paying for personal expenses out of business funds. That is the ultimate goal of your business, to make money so that it can support your personal life, but you want to avoid a financial mess. Try to avoid taking money out of the business haphazardly, for example, or you may lose sight of how much you’re actually taking out.
Instead, try to be very disciplined about how you take money out of the company. If you have an inconsistent earnings schedule, you may want to take out money only when you have amassed a certain amount of profits, for example. In other cases, you may want to pay yourself a certain salary on a regular basis. A trusted advisor can help you determine what’s right for your business.
Make a plan for overlapping expenses
Some personal and business expenses will overlap. You might use your cell phone for both personal and business use, or you might have a vehicle that you use partially for personal use and partially for business. Make a plan to deal with these expenses. Some examples:
If your phone is half for work and half for business, you might want to pay half the bill from your business account and the other half from your personal account.
Conversely, you may want to pay all of the bill from your personal account, then, in your bookkeeping records, record an owner equity contribution and a phone expense for half of the amount of the bill.
Separating personal and business expenses is critical to remain compliant with tax regulations and to track your company’s success. This can be challenging to handle on your own. Set yourself up for success by establishing separate accounts and setting up a bookkeeping system, plus be open to getting expert help when you need it.
Contact Franco Blueprint for bookkeeping assistance
Your business’s finances are the cornerstone to its success, and you don’t have to deal with them alone. At Franco Blueprint, we can help you implement an accounting system so that you can easily track personal and business expenses. We also provide CFO and other advisory services to businesses to help you see the growth and success you’ve always dreamed of.
Contact Franco Blueprint today to learn more and ensure you’re optimizing your business finances.