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 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 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. Pretty simple in theory, but gets hard in practice.
If something 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.
Open a business credit card and/or bank account
So, what’s the simplest way of solving this issue?
Having a separate business account provides you with an easy way to keep your private and business expenses apart. It also gives you an easy way to track your business expenses. When you use the same accounts for business and personal use, everything is mixed up on the same statement. It can be 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 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.
Having duplicate items for work and personal use makes it much easier to track expenses. Rather than determining how much of your cell phone bill you can deduct for business, you know that your business phone is 100 percent deductible. Same with your computer and your vehicle. It costs more—especially the separate vehicle—but it keeps your personal life separate from your business life.
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.
Talk to a financial advisor about what activities count as a tax deduction and which do not if you are unsure. An advisor will answer your questions and can even help you come up with a system to track your expenses.