There are some things in life that go together well and others that definitely do not. Business and personal finances are in the category of items that should really 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 so much more streamlined once you separate your personal and your business finances, especially when it comes to your expenses. Paperwork, finances 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 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 directly linked to your business earning an income is a business expense. If you buy something to be used for your business, it’s a deductible business expense. If you buy something to use privately, that’s a personal expense.
If you purchase an item that is mixed between business and personal, such as 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. So if you use the laptop for business 75 percent of the time and for personal use 25 percent of the time, you can only deduct 75 percent of the laptop.
Whether you use something entirely or partially for business, you need to have a record of the purchase and its best paid for from your business account.
Open a business bank account and/or credit card
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 really difficult to determine, or remember, which transactions were related to your business and which were for your private life.
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 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, which is incredibly difficult to do if your business and personal transactions are all linked to one account.
It can be tempting to try to write everything off as a business expense but don’t fall into that trap. Open separate accounts, buy duplicate items where you can and keep receipts of your business expenses as it is a requirement to keep these for 7 years. So, where are you going to store all those all those receipts? Check out the blog we wrote about the paperwork war.
If you need advice on setting your business financials up to your best advantage reach out, we can help!