It can be all too easy to allow your personal expenses get tangled up in your small business expenses. You’re shopping at Costco, getting things for your family, when you remember you need a couple things for the office. Before long it all ends up in the same cart and on the same receipt. In the moment, it may seem like the easier route to take. However, not separating business expenses from personal expenses can cause quite a headache for small business accounting, especially when tax season comes.
Here are 5 tips on tracking and separating business expenses for your small business:
- Set up separate bank accounts. As a small business owner, your first order of business should be to set up a separate bank account. To learn how to do that, visit this post. If you are diligent about keeping expenses separate, you should only need to review your business bank account statements during tax season to find deductions. If you have multiple charges for your business on your personal account, it can be hard to remember which ones were business expenses. Which makes it easier to miss important business deductions. Separating your business bank account from your personal account adds a layer of protection. Which is especially useful if the IRS audits your business.
- Learn to use a business credit card. Credit card statements can act as a proof of purchase when you don’t have a receipt. We do not recommend going into credit card debt on your business credit card. However, any interest you pay on the card is tax deductible. Building up a line of credit, earning points for travel, and receiving cash back on purchases for your business are added benefits of using a business credit card.
- Keep track of expenses–both separate and shared. You don’t have to write down every cent you spend each day, but you do need to keep track somehow. Track business expenses using a simple spreadsheet once a week, or use a budgeting app like Mint for instant updates on where you’re at with your budget. Some business expenses will inevitably overlap with personal expenses. Cell phone bills, portions of your mortgage/rent, utilities, internet, etc. are all examples of overlap. Choose one account to pay these bills from and be consistent. Keep track of bank statements and receipts to refer to during tax season. The most important part of small business accounting is to set aside time each week to take care of small business bookkeeping tasks. Letting too much time pass between purchases and recording them in your budget increases error.
- Set your salary as a small business owner. This can be difficult to do if your business’ profit fluctuates significantly from month to month. However, setting a salary to pay yourself as a small business owner helps you know how much money you’ll be bringing home each month, and how much money you’ll have to run the business. Just because you set a salary doesn’t mean it’s carved in stone. You can revisit your salary and adjust it quarterly, bi-annually, or once a year.
- Consult a professional. As your business grows, you’ll likely need to hire a professional accountant or bookkeeper to help you keep track of business expenses and finances, pay taxes, and invest your money wisely. Mazuma offers free small business accounting advice from professional CPAs who can help you navigate your business finances and answer any questions you may have.