Five things you can do right now to separate your business and personal expenses

You’re a contractor and you stopped at Home Depot to pick up supplies for your job, but you used money from your personal account to cover it. You planned to claim it as a business expenditure. To do it right, it needs to be recorded as an accounting transaction – and things can get complicated fast.

For some, especially those starting as sole proprietors, it can seem easier to use a personal checking account that’s already in place to manage finances. In fact, a 2015 survey from Citizens Bank found that 26 percent of small business owners use a checking account for both business and personal finances.

Don’t make this mistake – even though it is seemingly the convenient and expedient option.  It is an important responsibility as a self-employed businessman or woman to separate your business account expenses from your personal account expenses.

Here are some tips to help you do so.

(1) Streamline Recordkeeping for Tax Time

Recordkeeping isn’t always top-of-mind for you as a “solopreneur.” You are working hard to cement existing customer relationships and bring new ones on board. But, if you’re not prepared, tax time can be a real scramble.

When your clients are using one checking account for your home and office expenses, you will need to dig through their receipts to find one for an office printer, or sift through credit card statements to figure out which furniture purchase was for your rec room and which was for your office. You don’t want to miss out on important deductions that will put money back into your business.

Set up dedicated checking, savings and credit card accounts for your business and use them only for business-related expenses. So, when it’s time to file your returns, it will be much easier to identify all business income and expenses.

Start a designated file or box with all business receipts so they don’t get lost in a purse or wallet, or else scan them and store a copy digitally. If you use accounting or expense tracking software, you can also easily save and categorize your expenses so they’ll be fully prepared come tax season.

(2) See Cash Flow More Clearly

Most small businesses follow a similar ebb and flow of funds throughout each month. Many online services like Internet and utilities, for example, are billed the same day each month. But business cash flow is more difficult to follow when the account includes personal expenses such as the cable bill at the first of the month.

When you have a clear view of your business cash flow, you can be proactive about managing it and make regular business health checks to spot problems before they happen.

Reducing the risk of errors makes a small business that much easier to run. Tracking expenses separately gives you a good idea of how money is spent and helps you plan for the future with confidence. You can look at your expenses, determine which ones take up the bulk of your cash flow, and figure out where you may need to look for cost-savings.

(3) Have Everything in Order for an Audit

Separate business accounts are not only important for accurate tax filing – they’ll also keep things in order if the IRS audits your business. If there’s a question about whether your venture is a hobby or a business, the IRS checks to see if you have a separate checking account. If you’ve comingled business and personal expenses, there’s a bigger chance of incorrectly categorizing transactions.

In fact, many correspondence audits focus on one area of the return. If your Schedule C is chosen for an audit, you’re required to submit bank statements to the IRS. Do you really want to submit your personal financial information if you don’t have to? Separating finances will make for a less painful tax audit.

Set up a business checking account where you understand the fine print, fees, and balance requirements. Make sure you also have the supporting documentation the IRS can request for any business deduction claimed, including the expense amount, where and when it was made, and the business purpose.

(4) Build Business Credit and Profile

Small business owners typically rely on personal credit and assets to fund their business. Banks won’t consider okaying a loan or providing credit to any person or entity that doesn’t have a credit history. Opening a business bank account and credit card is an important step that will build your business’ credit profile.

Using a business credit card shrewdly for business expenses only helps to increase your business credit card limit. This is especially critical when it comes time to make significant business purchases down the road with lower interest rates.

It’s also worth noting, a business credit card won’t always impact a personal credit score. In some cases, the interest paid on a company credit card is deductible as a business expense.

(5) Know the Sales Tax Obligations

Is your business classification a good fit? If you’ve started as a sole proprietor, you may have grown so that it makes sense to file as an LLC or take advantage of tax savings by making an S-Corp election.

If you formed a corporation or LLC, then you are required by law to separate business and personal finances. That’s because a corporation or LLC is a distinct legal entity from the business owners. So, it also needs its own bank account and tax identifier number.

This separation also minimizes your personal liability as the business owner. If the company is sued, the plaintiff can try to show that you have mixed your personal and business finances and come after your personal assets.

Does it make sense to change your business entity? There are costs to do this.  Reach out to a Dugan & Lopatka professional at (630) 665-4440 or to seek advice that can help you with a cost-benefit analysis and get your financial ducks in a row.

The nice thing about these five steps is that these are all relatively simple changes that can really help you from a taxation point of view and set up your business for growth!

From an October 2, 2019 post on 

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