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separating business and personal expenses

7 Smart Ways to Separate Business and Personal Expenses

Posted on December 20th, 2019

Do You Avoid Separating Business and Personal Expenses?

You’re in good – or should we say, bad – company. Over half of American business owners use either their personal checking account or credit card for business purposes according to a TD Bank Survey.

Why is that such a bad thing? For starters, if you’re ever audited by the IRS, you’ll need to prove that every expense you deducted for business purposes was legitimate. Separating business and personal expenses becomes even more important in the case of a lawsuit (we’ll dive deeper into the #1 “golden rule”).

Here at Robert P Russo CPA, we ensure our clients understand the importance of separating business and personal expenses – and exactly how to do just that.

 

1) The Golden Rule of Separating Business and Personal Expenses: Create the Right Business Entity!

This may seem obvious, but the sooner you form an official structure for your business, the better. The reasons for officially forming a business entity transcend accounting and taxes, and move into life-altering situations.

For example, let’s say you have been operating a side business as a sole proprietor, making porch swings. One swing out of hundreds breaks, injures a person, and you’re being personally sued for $1 million. If you had set up any of these other business entities, such as an LLC, you’d have a better chance for making a case that your personal assets are off limits. After all, LLC stands for “limited liability company.”

However, simply having an LLC isn’t enough…if you’ve never bothered separating business and personal expenses! The judge might allow the injured person to go after your personal assets – from your home to your savings accounts – instead of the $1,500 in your business account.

Now that we have your attention about the importance of selecting the right entity – and separating business and personal expenses – take action. Contact a qualified CPA, like members of our team at Robert P Russo CPA, to analyze which business structure is best for you.

 

2) Open a Credit Card and Checking Account, Use it ONLY for Business Purposes

Next up on our list of tips for separating business and personal expenses is to immediately set up a business checking account and credit card after creating your entity. Depending on the entity you chose, you may have a separate Tax ID number – known as an EIN. This will be associated with your accounts going forward, and will help you build credit for your business.

You may face temptation when separating business and personal expenses thanks to alluring offers from credit card companies. They may promise $250-$500 cash back if you spend a certain amount on your business credit card within a few months. Don’t fall into the trap of using that business card for personal expenses! Think of that potential audit or lawsuit – it’s just NOT worth it.

 

3) Track What You’ve Invested Into Your Business

In most cases, business owners start up operations using some of their personal savings. That’s fine from a tax and accounting perspective. But be sure you record this in your business ledger because this amount is typically considered “owner equity” and is not taxable (there are exceptions, talk with a CPA to review your situation). 

 

4) Splitting and Separating Business and Personal Expenses Related to a Single Item

Not everyone likes to have two smartphones: one for business, one for personal. So how can you go about separating business and personal expenses you incur for a single smartphone or laptop? What about Internet fees? You’ve got two options. You can deduct the actual amount used for business purposes from your bill each month. Or, if you have a home office, you can deduct all utilities – such as Internet fees – at a percentage that relates to how much square footage your office takes up compared to your home’s total square footage. A qualified CPA can help you sort out which is more beneficial for you. See, you’ve got options for separating business and personal expenses!

 

5) If You DO Use a Personal Account for a Business Purchase? Track It!

It happens. You’re purchasing office supplies, and you left your business credit card at home. You have no choice but to whip out your personal card and pay. Good news, you won’t miss out on that deduction, as long as you pay yourself for the supplies via your business account AND you’ve saved your receipt. Proof is essential when separating business and personal expenses.

 

6) Convenience at a Cost: You Need to Separate Business and Personal Expenses Online

Temptation arises again. You need to buy business equipment online right away and the supplier only accepts PayPal. The only PayPal account you have is tied to your personal social security number, not your EIN. PayPal requires a few documents before they’ll set up your business account, so what do you do if you’re getting serious about separating business and personal expense? If it’s a one-time occurrence, go ahead and use your personal PayPal account and reimburse yourself – just like we mentioned in tip #5. But don’t make this a habit! Set up business accounts for Amazon, PayPal, etc.

 

7) Get Smart About Separating Business and Personal Expenses While Traveling

Now here’s where things get a little more complicated in regards to separating business and personal expenses. What happens if you live in the Northeast but have business in Florida in the dead of winter? You want to bring your family along, but you’re unsure how to go about separating business and personal expenses. First, you know what to do: talk to a qualified CPA before you start trip planning. And of course, review these general rules about deducting travel expenses. You’ll learn things like the fact that you can deduct lodging for you only, not your family – and only on the days that you spend primarily engaged in business work (not on the days you went to Disney World).

Now that you’re informed about the basics of separating business and personal expenses, the next step is to put what you’ve learned into practice. Save all receipts, track every expenditure in QuickBooks or whichever accounting software you use, and by all means, speak with a CPA so that your business is set up for success!

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Updated Rules: Deductible Business & Other Expenses

Posted on December 4th, 2019

Taxpayers using optional standard mileage rates in computing the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes should be aware of an updated set of rules. The updated rules reflect changes to certain deductible expenses resulting from the Tax Cuts and Jobs Act (TCJA). Read More…

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Business Tax Provisions: The Year in Review

Posted on December 4th, 2019

Here’s what business owners need to know about tax changes for 2019. Read More…

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Tax Breaks for Business: Charitable Giving

Posted on December 3rd, 2019

Tax breaks for charitable giving aren’t limited to individuals, your small business can benefit as well. If you own a small to medium-size business and are committed to giving back to the community through charitable giving, here’s what you should know. Read More…

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Employer Benefits of Using the EFTPS

Posted on December 2nd, 2019

Small business owners who are also employers should remember that the Electronic Federal Tax Payment System (EFTPS) has features that make it easier to meet their tax obligations – whether they prepare and submit payroll taxes themselves or hire an outside payroll service provider to do it on their behalf. Read More…

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Tax Benefits of Health Savings Accounts

Posted on December 2nd, 2019

While similar to FSAs (Flexible Savings Plans) in that both allow pretax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits such as contributions that roll over from year to year (i.e., no “use it or lose it”), tax-free interest on earnings, and when used for qualified medical expenses, tax-free distributions. Read More…

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Deferred Tax on Gains From Forced Sales of Livestock

Posted on December 1st, 2019

Farmers and ranchers who were forced to sell livestock due to drought may get extra time to replace the livestock and defer tax on any gains from the forced sales. Here are some facts about this to help farmers understand how the deferral works and if they are eligible. Read More…

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