With various receipts, statements and other records, it's all too easy to mix your business and personal expenses. However, this co-mingling of funds could cause you to lose valuable tax deductions or even to pay penalties if these records get too confused. By clearly separating your business and personal expenses, you can reap financial and organizational benefits.
Open a Checking Account
A business checking account helps you to maintain separate records. If you have a business checking account, you can use it to pay for supplies or labor. Richard Salmen, a certified financial planner, says that the Internal Revenue Service checks into whether a person has a separate checking account when investigating whether tax claims were for a hobby or a business. This separation helps you isolate transactions for business from those for personal expenses. Bank statements provide a record of your business transactions. Any accounting software should be set up for two accounts: the business account and the personal account.
Open a Credit Card Account
A business credit card helps you to establish a record of separate expenses, and you may need it for transactions when a check is not accepted. If you are at a store where you are purchasing personal and business items, complete the purchases as two separate transactions. You may also be able to deduct the interest on a business credit card, providing you with a tax incentive to keep this account separate from your personal charges.
Systematically maintain organized records. Reconcile your business checking account. Keep receipts in a safe location, such as a binder or pocket folder and, within the same week, highlight all of the expenses that are business-related. Review the bank and credit card statements to ensure that they only have business expenses on them. Delete any personal expenses from them and track any personal deposits that you make to your business account to reimburse your business for the personal item. Maintaining organized records year-round can help protect you in case of an audit.
Schedule time each week to evaluate your progress. Set aside at least 15 minutes each week to organize your expenses. Making this part of your routine can help you stay on top of your finances and be organized for tax time. Compare receipts with your accounting software and correct any mistakes to keep information in real time.