A common mistake business owners make can cost you dearly with the IRS: not separating your personal finances from that of your business.
Failing to track your business versus personal expenses can end up harming your business come tax time. The IRS might deny you certain deductions, or even choose to audit your business.
Keeping your business separate has an impact on your professionalism, as well. Maintaining your business and all related transactions as a separate, official entity lend to your legitimacy and trustworthiness in the eyes of your clients.
If you want to build a successful business in the long term, it’s important to avoid the pitfalls of commingling your expenses. Read on to find out how to set your business up for financial independence and success.
Register Your Business
It’s good practice to establish your business as a separate legal entity. Consider a structure such as an LLC, S Corp, or C Corp. Use the IRS to register for an EIN (Employee Identification Number) to legitimize your tax status.
Giving your business separate legal status is advantageous in many ways. If you want to protect your personal assets from business-related debt, lawsuits, and loss, make sure to contact your tax or legal adviser. Work with a professional on the best options for establishing your business.
There’s no better way to separately track your business expenditures than with a business checking account. Strict adherence to this policy will provide you with important data for taxes, profits, and more. When your business money never touches your personal bank account and vice versa, you’ll know exactly how much your business is pulling in and shelling out each month.
Don’t use your personal credit for business purposes. While you may feel hesitant to open another line of credit, business credit cards offer a number of benefits you may not have access to from a personal credit card.
First, a business card separates your personal funds from that of your work. Going this route offers an extra layer of protection for your personal assets, especially from credit reporting.
Building a business credit score boosts your credit profile, allows you more borrowing power, and might even qualify you for better interest rates on business loans. Business cards often come with perks such as higher cash back benefits and discounts on travel and purchases.
It’s likely that you’ll contribute financially to your business, especially in the beginning. Whether you use your property, purchase property, or contribute cash to your business, you need to clearly designate that money.
You can contribute officially as an owner investment or a loan. Keep paperwork on such contributions, stating how it is to be reimbursed or written off, and how it will be stated on your yearly taxes.
Separate and Keep All Receipts
In the case of an audit, you want to make sure you’re prepared to supply all relevant paperwork and transaction records. Make a habit of keeping all receipts, personal and business related, organized in two files. This practice means you’ll have a backup of all transaction records and a way of holding yourself accountable.
Take a Salary
This one is easy to forget, but it’s essential. Pay yourself a salary like you would any employee. You may expect to make little or break even early on, but having a concrete amount of money that is your own profit will keep you from borrowing company dollars.
Never use the business checking account or credit card for personal expenditures, either. Treat your income like you would any employee, and treat your business like you would any employer.
Keeping receipts should help in this regard, as any transactions made with your business accounts should be easily traceable and should never wind up in your personal record.
Track Your Expenses
Owning a small business often gives you certain advantages, such as. You can write off company meeting luncheons, an office, and many day-to-day purchases.
The way this can come back to bite you is not tracking every business expense. Make sure personal and business expenses are on separate receipts. Keep detailed records of any write-offs, including saving the receipts and budgeting a separate category for write-offs in your books.
Personal items used for business purposes, such as your vehicle or cell phone, can also count as business expenses. Make sure to get with your tax adviser to ensure you’re keeping the right records for dual-use assets. A tax professional will guide you in getting the most money back that you can.
Once you’re educated about the differences between personal and business expenses, flesh out a policy that every employee can follow. Make sure everyone is on the same page with handling records and expenditures.
When your team commits to the same procedures as you, it’s easier to keep accurate records and stay on track.
Stay On Top of Separating Personal Expenses
While it may seem arduous to take all these extra steps with your personal expenses, you’ll thank yourself later. Tax season is always right around the corner, and the time and money you’ll save yourself are worth the hassle.
To keep your business strong, it helps to lay a solid financial foundation. Instituting these policies as soon as possible will help them become second nature. This will keep your books as simple and manageable as possible.
Need more financial advice for your business? Visit the Resource Center at Dealstruck for more info on how to apply for a business loan, manage employee benefits, and more.