When you own a business, especially when you are just starting out, it can be easy to fall into the trap of using your personal money to fund business expenses. However, this can pose serious problems when tax time comes around, as businesses are taxed differently than individuals. Instead, it is better to keep everything related to your business separate from your personal expenses. Not only will this make your taxes more straightforward, but it will also minimize your risk of getting audited. Here's what you need to know to do it right.
Start with Separate Bank Accounts
As part of launching your business, one of the first things you should do is set up a dedicated bank account specifically for the business. Even if you have been up and running for a while, it is never too late to get started. Although it can be tempting to borrow from the business account when you are a bit short on personal cash, and vice versa, you should avoid doing this as much as possible. Once you start doing this, it is easy to fall into this bad habit on a regular basis, and that defeats the purpose of separate bank accounts. If you were working for an employer, you wouldn't borrow from the company funds to pay your personal bills, and you shouldn't borrow from your own business either.
Open a Credit Card for the Business
If you do need to borrow money to cover business expenses, it is far better to use a business credit card. Not only will this prevent you from borrowing from your personal funds, but you'll also be building up your company's credit score, which is separate from your own. This way, when you need to borrow larger amounts of money in order to grow your business in the future, you'll already have built-in borrowing power. Many business credit cards provide other benefits as well, including reward points and purchase insurance, for example. Credit card issuers offer different benefits, so take the time to do some research to determine which card makes the most sense for your business.
Keep Your Family and Business Partners on the Same Page
Just because you know not to blend personal and business finances doesn't mean that others in your close circle do as well. For example, your spouse and kids may think that because the business is doing well, you can now afford to take that expensive vacation you've been dreaming about for a while. If you have the personal funds to pay for it, by all means, reward yourself for your hard work, but don't pull that money out of the business. Similarly, if you have business partners who can access company accounts, make sure that they are aware that they are not to use company funds for their own expenses.
Track Your Tax Deductions
As a business owner, you may be able to write off some of your expenses in order to lower your tax burden. For example, if you provide lunch at a meeting in your office, you can likely deduct this as a business expense. However, if you met up with a friend for lunch during your break from work, that is not deductible. It is tempting to try to write off as much as possible by cleverly arranging your expenses, thinking that the IRS won't notice. This is a risky path to take, though, and you could be exposing both your business and your family to a stressful, time-consuming audit.
Store Your Receipts Securely
If you take the standard deduction on your personal taxes, you likely don't need to save your receipts in order to itemize your deductions. With a business, on the other hand, you'll need to keep all of your receipts to verify your business expenses. Stashing them all in a box or drawer is a great start, but it won't do you any favors come tax time. As you store each receipt, take the time to organize them into categories. This will make itemizing much more manageable and save you a lot of headaches when it is time to file your taxes.
If your company doesn't yet have an accountant, it is a good idea to hire one when the company can afford to do so. Even if that isn't in your budget, you can still work with a tax professional to ensure everything is prepared accurately. This is well worth the added expense to prevent audits and keep your business finances in order.