Personal VS. Business EXPENSES

Having your own small business has it's advantages. Expenses can be allocated to the business for tax incentives. Now that it is end of year, once the holidays are over, it is time to get ready for tax season. But how would you know what can be allocated towards the business and what expenses stay as a personal expense. Let us go over what qualifies as either or to make it easier to keep track of all your expenses. It is very important to separate personal and business. Keeping expenses organized with regular bookkeeping makes it easier when the information is needed.

“Keeping expenses organized with regular bookkeeping makes it easier when the information is needed.”

What is PERSONAL AND WHAT IS BUSINESS:

Any expense that is directly linked to your business, is what is considered a business expense. It is crucial for an owner to know what is considered a business and personal expenses as business expenses are deductible. This can in turn lower your taxable income and therefore reduce the amount of taxes that you owe. Deductible business expenses can include:

• Depreciation

• Rent or Mortgage

• Interest loan payments

• Taxes

• Salaries which include any employee benefits

• Insurance related to the business

• Utilities

• Office expenses which include supplies bought for the business even if you have a home office.

• Professional subscriptions

• Marketing & Advertising

• Repairs & Maintenance

• Travel expenses

• Business meals

ITEMS USED FOR BUSINESS & PERSONAL:

There will always be items that you purchase for both personal and business purposes. Among some examples can be a computer, laptop, phone and car. For these items, there is a percentage that can be attributable to the business. If you use your computer for business 90% of your time, deduct 90%. It is important however to have backups and explanations for all you classify to your business. Keep in mind that if ever audited, you will be required to show backup for what you have inputted into the business. Fines and penalties will qualify plus the tax owed if backup is not provided.

WAYS TO SEPARATE business & PERSONAL

Business Bank Account: Simple steps as opening a business bank account can help you keep things separated. Keep your bookkeeping up to date and it simplifies tax season at the end of the year. When purchasing both business and personal related items in one transaction, keep clear what belongs to what so it can be separated in the books accordingly.

Business Credit Card: Having a business credit card can be beneficial for your business for various reasons. One, is a way to have credit available whenever necessary, it also helps build your business credit and it is an additional way to keep your transactions separate from personal. There are credits cards that offer cash back so review the various business credit cards available and choose one that is best for your business.

GET FAMILIAR WITH IRS GUIDELINES

The IRS offers guidelines to give you a starting point on what can and can't be included as a business expense. These are some IRS publications that you can start off with to get you going on your understanding of business expenses.

Business Expenses: Publication 535 covers Business Expenses. It will cover the newest changes and also cover some of the forms depending on your business set up. It will break down what expenses you can deduct and how much you are allowed to deduct as there are expenses that only a percentage is allowed to be deducted.

Travel, Gift and Car Expenses: Publication 463 covers travel, car and gift expenses. This is great for those that car and travel is something that is a common expense in your business. This publication will explain what expenses are deductible, how to report them on your return and what records are needed to prove your expenses.

Tax Guide for Small Business: Publication 334 breaks down very important aspects related to taxes for any small business. IT will break down what you will need, forms to be filled out and important information.

Miscellaneous Deductions: Publication 529 covers miscellaneous deductions that you could take advantage of for your business. Reviewing this publication can help with not so obvious deductions. The publication also has a list of expenses you can deduct and which ones you can't.

IN CONCLUSION

It can be tempting to write everything off for business purposes. I am sure you know someone that has gotten away with this but it is not recommended. IF you are ever to be audited, you want to make sure you have all of the backup necessary to prove that the expense is business related. Know your benefits, know your deductions, know your business advantages. Don't know where to start? JNA can assist. Book your FREE initial consultation and as always, sending positive vibes your way 🙏

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