Starting a Business

Keep Your Business and Personal Finances Separate

Peel the two away from each other--and avoid tax headaches--with these 4 tips.
4 min read
Opinions expressed by Entrepreneur contributors are their own.

Business owners intertwine business and personal finances all too often. After all, you are your business, but muddling up the two will mean a mess at tax time.

Even if you're just starting out, it's essential to split up these two parts of your money life. Treat your business, big or small, like a viable entity.

"That starts with tracking your business expenses separately from your personal, even though initially it may feel like they are one in the same if you are a one-man shop," says Cynthia Heil, a certified financial planner with Cascade Financial Management in Tampa, Fla.

Here's how you can peel your business away from your personal finances.

  1. Maintain separate checking accounts
    Start with your bank. Open a business checking account.

    "If there's ever a question as to whether it's a hobby or a business, the IRS looks to see if you have a separate checking account," says Richard Salmen, a certified financial planner with GTRUST Financial Partners in Overland Park, Kan.

    If you use Quicken, Quickbooks or Microsoft Money, Salmen advises making sure you have two separate systems: one for personal and one for business.

    Not only is having two accounts tax-smart, it will also improve your organization.

    At the end of the year, all your income and expenses will be in one place, making record keeping and tax filing easier. If you try to separate all your records in March or April, you won't be able to accurately remember all the money moves from the prior tax year. Keeping good records year-long will give you proof of your business expenses if you do get audited.
  2. Use a business credit card
    Lending requirements are quite strict for small businesses. Still, try to get a business credit card. Like the separate checking account, a credit card will help your record keeping and give you something to show the IRS if you're audited.

    The business credit card could give you an extra tax deduction too.

    "If you need to carry a balance on a business credit card, that's the only credit card interest that's deductible as a business expense," Salmen says.
  3. Make it official
    Consider establishing a limited liability company (LLC) or an S Corp for your business.

    Sit down with your team of advisors--attorneys, CPAs, financial planners and insurance agents--and determine what entity makes the most sense, how this business will impact your taxes and financial plan and what insurance coverage you should consider, Heil says.

    These business entities will also give your personal finances a new level of liability protection, which could come in very handy of your business is ever sued.
  4. When it's time to file
    Having a checking account, credit card and record keeping software earmarked exclusively for business use will give you most of what you need to file your taxes and to prove to the IRS that your business really is a business. But there are other considerations, too.

    If you use a home office, you're eligible for a deduction, but only if you do it right. Even then, you could be in for an audit.

    Salmen shared the story of one of his clients. The wife was a salaried employee and the husband ran money-losing photography business out of a home office. He was eligible for the home office deduction, but because his business lost money, Salmen warned it might be a red flag for an audit.

    It was.

    They took photos of the office, which was used solely for business, and after the audit, they were able to keep the home office deductions.

    "People are way too afraid to take the home office deduction because they don't want to be audited, but take it if it's legitimate," Salmen says. "The key is that it has to be used exclusively for business. You can't have a daybed in it for visitors."

 

More from Entrepreneur

Grow Your Business at Entrepreneur LIVE! Join us on Nov. 16 in Brooklyn, NY, to learn from legends like Danica Patrick and Maria Sharapova, pitch our editors, meet with investors, and potentially walk away with funding!
Register here

One-on-one online sessions with our experts can help you start a business, grow your business, build your brand, fundraise and more.
Book Your Session

Whether you are launching or growing a business, we have all the business tools you need to take your business to the next level, in one place.
Enroll Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.