Many business owners mix personal and business finances, especially if they are a one-man shop. This is foolhardy as it can result in a quagmire during tax time. It is essential to separate business, and personal finances for some reasons, and here is how you can disentangle business funds from personal monies:
Keep separate checking accounts
If you are using Microsoft Money, QuickBooks or Quicken, maintain two separate systems: one for business and the other for personal finances. This will obviate any problems when filing tax returns as well as improve your organization. At the end of each year, all income and expenses will be found in one place, thus, making tax filing and record-keeping easier. If you attempt to separate the records towards the end of the financial year, you might not remember all money moves from the previous year- unless you have an eidetic memory. Moreover, keeping clean, separate and tidy records all the time will serve as evidence of your business expenses if the IRS decide to audit you.
Acquire a business credit card
Though lending requirements for startups and small businesses are quite stringent, getting a business credit card is still prudent. It will help in record keeping as well as serve as proof of business funds in case of an audit. Besides, a business credit card can grant you an extra tax deduction, too.
Maintain separate shoeboxes for the receipts
You should have two physically separate places for business receipts and personal receipts. In case you don’t have time to gather and sort both business and personal receipts, it is wise to prioritize business receipts. Tax auditors aren’t interested in your personal finances, but will obviously be interested in the business receipts.
Set a budget for the business
A majority of small business entrepreneurs pump money from personal accounts into the business’ account if the business is experiencing a shortfall. However, if you have a clear budget for the business that is based on the business’ current earnings, you can help avoid such an eventuality.
Give yourself a salary and try not to exceed it
Give yourself a salary of the same amount each month from the business’ checking account to the personal checking account- and resist every temptation to exceed it. This way, it is easier for your business finances and personal finances to stay on budget.
If you haven’t been separating personal finances from business finances, don’t worry: it isn’t too late to start. Follow the tips outlined above, and you won’t have problems when it comes to filing tax returns.