“Don’t mix business and personal finances,” is one of the most common pieces of advice given to business owners. And for good reason. Many business expenses can be deducted from your taxes but most personal ones cannot be. So when personal expenses get recorded in your business’s financial records, you’re setting yourself up for trouble later on.
It’s important to make it as easy as possible for your preparer to file your business’s taxes. Asking them to sort through a combination of business and personal records isn’t the best use of the time you pay them for. If you can hand over a clean set of books that have all your business expenses accurately recorded, they’ll be able to spend more time preparing the best possible tax filing for you.
Business records should also be an indicator of how well your business is performing. But when your books are muddled with personal expenses too, it’s hard to make sense of your cashflow. You should be able to get a strong understanding of your finances through regular bank reconciliation. However, you’re creating more work for yourself if you have to first separate your business transactions from your personal ones.
Now that you know why keeping business and personal funds separate is important, here are a few tips on how it can easily be done.
Open a bank account for your business
Opening a dedicated business bank account should be one of the first things you do when launching a business. Right from the start, all your bills and expenses should be paid out of your business account and all your revenue should be deposited into it. This makes for accurate and simple record keeping, since all your funds are moving through a single account.
Pay yourself a salary
Your business likely has a better chance of succeeding if you pay yourself a consistent salary instead of pulling money from your business account at random times. It helps you stay on budget, which is crucial to achieving long-term success.
Apply for a business credit card
Having a business credit card can be beneficial, especially if you’re on the move for work and need to make a lot of purchases while out. You can pay the balance directly from your business bank account, which keeps your record keeping efficient. And you have the added benefit of building strong credit for your business.
Be careful of the gray areas
There are going to be times when you spend money for both business and personal reasons. Maybe you pick up snacks for your office along with groceries for your home or pay for your significant other to join you on a business trip. Situations like these occur often and need to be expensed properly. A tax professional can help you get the deductions you’re entitled to without skirting the law.