It's not personal, it's your business
You may think of your business as an extension of yourself, especially if you're a sole proprietor or the only shareholder. But keeping the two of you separate — particularly in the area of finances — is a tax-smart move. One reason: In addition to making sure the expenses you pay are ordinary and necessary, you need adequate records to support them so you can claim a deduction on your business return. Intermingling personal and business finances may lead to disallowed deductions.
Here are three ways to separate your personal and business life.
- Set up a bookkeeping system. In general, federal income tax law does not specify a particular type of recordkeeping system. Your accounting records can be as simple as a logbook with pockets to store receipts. The main requirement is to track your expenses in a manner that provides a complete and accurate account of your business activities.
- Open a business bank account. Having a separate bank account can help put to rest the question of whether you are running a business or indulging in a hobby. Why? To open a business account, financial institutions usually require employer identification numbers, business licenses, certificates of incorporation, and other legal documents that signify genuine business activity.
- Take a salary. Besides providing a clear separation between your personal and business expenses, paying yourself a reasonable wage helps you maintain a budget. Establishing a distinction is especially important for corporations. In some cases, amounts you withdraw from your corporation for your personal benefit can be considered dividends instead of a deductible expense.
If you need help establishing or organizing your business records, please do not hesitate to contact our office.
"Tax Tips" are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.