When you own your small business, it’s often easy to intertwine your personal and business finances. But this is a big mistake. You want to keep the two of them separate in order to build financial growth in the long run and make sure you’re keeping track of your taxes or ongoing expenses. Making sure that your personal and business capital are kept separate is essential.
Even when you’re growing a small business, you may want to find as many ways as you can to save on money through tax deductions. When you fail to see how business and personal expenses are different you could end up facing legal consequences such as audits, or worse. Below are four tips for keeping the two expenses separated:
1. Use Different Accounts
Even though this seems like it should go without saying, this is something that a lot of people don’t do. Even when you’re just starting out in your business, this is very important. You want to track your personal finances and business expenses separately, or you may have a lot of problems when it comes to your taxes.
If you’re using QuickBooks, make sure that you’re having two systems for your business and personal financial activity. When you keep clear records throughout the year, it’s going to help you with proving business expenses.
2. Have a Credit Card for Your Business
When you are buying something for your office, like office stationery, or you’re buying a plane ticket for business travel, having a credit card for your business will help greatly with separating the financial activity for your business from what you’re purchasing for your own personal use.
It doesn’t matter how small or large your expense is. You should always keep your business expenses on your credit card so they’re easily tracked later. Having a credit card for your business will also help with building your business’s credit score.
3. Have Your Own Legal Entity
Having a different legal entity that’s just for your business is one of the best ways that you can protect your private funds and personal liability. The structure of your business is going to determine the amount of tax you’re paying, the amount of ongoing costs you’ll have and the responsibilities you have as the owner of the business.
4. Pay Yourself
Whether you’re your sole employee or you have employees under you, make sure you’re paying a salary to yourself and you’re not being stingy about it. Making sure you’re paying yourself the same amount on a regular basis is going to help you keep on track both with your business and personal finances.
Also when you’re setting a salary it means you’re not dipping into your business account to help pay your personal expenses. This also will make it hard to report your expenses. You also should have a business budget and make sure you’re conservative when it comes to what your business is able to afford and what it can’t.
When you’ve established a budget, it means you’re not going to find that you’re pumping extra money into your business account and depleting personal funds anytime there is a shortfall in your company.
When Worlds Collide
Sometimes there are times when you’ve had expenses that you can classify as both personal and business use. An example would be if you’re working from home and you only have one phone line both for personal and business use.
This is when you have to figure out the amount of that expense that is being used for personal and the amount that is used for your business. The reason for this is because you’re only allowed to claim the amount that you’re using for your business. If possible, it’s a good idea to have a mobile phone that you’re using just for your business so that things are a lot clearer.
It’s also important that you aren’t writing off dinner or entertainment expenses on your taxes that aren’t related to work. When you eat out with family or friends, it’s not for your business so you want to make sure you’re keeping everything clean. Otherwise you’re going to run into a lot of problems when you are doing your taxes.
Have More Questions?
If you have more questions about your bookkeeping needs, give EZ Ledger, Inc. a call today at 239-249-8086. We would be happy to answer any questions you might have regarding bookkeeping and how we can help. We offer many services, and we look forward to doing business with you in the future!
