There are some things in life that go together well, and then others that definitely do not. Personal and business finances are in the category of items that should not be mixed. Although it may seem complicated to keep them separate, who wants to manage all those bank accounts? Your life will be significantly simplified once you separate your personal and business finances, especially your expenses.
Taxes and paperwork will be easier to manage, and you’ll have a better idea of how much money you put into your business. Below are some tips to keep your business and personal expenses separated.
Understand the difference between business and personal expenses
Mostly, the line between personal and business expenses is apparent. Any expense that is directly related to your business gaining an income is a business expense. Say you buy something to be used for your business, it’s then a deductible business expense. If you buy something to use privately, that’s a personal expense.
If something is of mixed-use, such as a laptop that you use partially for business and partly for personal use, you can only claim a deduction for the amount you use for business. So if you use the laptop for business 70 per cent of the time and for personal use 30 per cent of the time, you can only deduct 70 per cent of the laptop.
Whether you use something partially or entirely for business, you need to have records of when you purchased it. You also need to show how you reached the breakup of business v personal usage.
Open a business credit card and/or bank account
Having a separate business credit card and/or bank account provides you with an easy way not only to keep personal and business expenses apart, but it also gives you an easy way to track the expenses. When you use the same accounts for personal and business use, everything gets mixed on the same statement. It can be challenging to determine which transactions were related to your business and which were for your personal life.
With business accounts, you will know that every transaction is related to your business and should be deductible. You won’t have to search through each bank statement at tax time to highlight the deductible expenses because every transaction is business-related.
You can also quickly check your statements to see how much money your business is spending. That isn’t easy to do if your personal and business transactions are all linked to one account.
Where possible, buy business items separate
Depending on how small your business is, it may not be possible to keep all items separate, but buying devices used for both business and personal use gets complicated. In an ideal world, you have a different computer for home and work, separate personal and work mobile phones, and even separate vehicles.
Having duplicate items for personal and work use makes it much easier to track your expenses. Rather than determining how much of your mobile phone bill you can deduct for business, you will know that your business phone is entirely separate and deductible. The same will apply to your vehicle and laptop. It will cost more, especially the different car, but it keeps your personal life separate from your business life.
Final thoughts
It can be tempting to write everything off as a business expense but be careful you don’t fall into that trap. Open separate accounts, keep receipts of your business expenses and buy duplicate items where you can.
It’s best to talk to a financial advisor about what activities count as a tax deduction if you are unsure. An advisor will answer your questions and even help you develop a system to track your expenses.
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