There are certain things in life that blend well and others that absolutely don’t.
Personal and business finances are the type of thing that shouldn’t be mixed.
We understand that it may appear to be difficult to keep separate, but your life will be much more streamlined once you distinguish your business and your personal finances, especially your expenses.
Your bookkeeping, paperwork and taxes will become much easier to handle and you’ll have a better picture of how much money you spend on your business. Below are some tips which may help you to keep your business and personal expenses separate.
The difference between business and personal expenses
Generally, the difference between business and personal expenses is obvious. Any expense that is directly related to your business gaining an income is a business expense. If you purchase an item to be used for your business, it’s a deductible business expense. If you purchase an item to use privately, that’s a personal expense.
If something is used for both business and personal, such as a mobile phone which is being used partially for business and partially for personal use, you will only be able to claim a deduction for the amount that you use for business. Therefore, if you use the mobile phone for business 70 percent of the time and for personal use 30 percent of the time, you can only deduct 70 percent of the mobile phone.
Whether you’re using something wholly or partly for business, you’ll need to have a record of the purchase.
Use separate bank accounts and cards
Having a business bank account and/or credit card will give you a simple way to not just keep your personal and business expenses separate, but also provides you with an easy way to monitor your expenses. If you are using the same accounts for business and private use, everything is combined on the same bank statement, and it can be tricky to identify or recall which transactions were related to business and which were for your private life.
If you use business accounts, you will know for sure that all transactions are connected to your business and so should be deductible. Then at tax time you don’t need to examine every bank statement and highlight the deductible expenses because every transaction is business related.
You may also choose to review your statements to see how much cash your business is spending. This is very tricky to do if your personal and business transactions are all joined in one account.
Purchase separate business items
You may not be able to keep all items separate if you are just starting out in business but purchasing items for example like a computer which will be used for both business and personal use can become problematic. Ideally, you would have a separate business computer and personal computer, a separate work and personal mobile phone and even separate vehicles. Having duplicate items for work and personal use makes it much easier to track expenses.
If this kind of arrangement is out of reach and you need to share a device across both your private and business life, then you need to determine what percentage can be deducted for business.
In conclusion, it may be tempting to want to write everything off as a business expense but make sure you don’t fall into that trap.
Open separate accounts, buy double items where you can, one for business and one for personal and always keep receipts of your business expenses.
If you are unsure, contact our tax champions to find out which activities will be a tax deduction, and which will not. We can assist with your queries and can even advise you on how you can work out a system to track your expenses.
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