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The Importance of Separating Personal & Business Expenses

Written by prositesfinancialApr 23 • 3 minute read

separating expenses

Accurate bookkeeping is an essential component of any business. Keeping up with financials is much easier when business expenses are separate from personal spending. Having a bank account reserved exclusively for business is recommended to avoid any confusion later. Take some time to learn more about the importance of separating personal and business expenses.

Tax Reasons

It is much less challenging to track tax-deductible expenses with a dedicated business account for spending. Ensuring business expenditures are separate will also protect your personal assets in the event of an audit. When tax season comes, you’ll be better prepared and more confident that the information provided is correct.

Even the slightest oversights on taxes can add up to a considerable amount of unclaimed savings over time. In some cases, tax errors can result in costly penalties or fees. To prevent any potential tax issues, avoid using a single account for both personal and business purposes.

Protect Your Personal Finances

Creating a separate account strictly for business use will ensure your personal financial information remains protected. If your company is involved in litigation, a lack of distinction between personal and business expenses can cause problems. Paying invoices and bills with an isolated business account will minimize your liability exposure.

Using a business account also helps to maintain the professional image and credibility of your business. Payments made to vendors or third parties will reflect the name of your business instead of your personal information, ensuring there are no misunderstandings.

Tips for Separating Your Finances

Comprehensive financial planning is necessary for any successful business. There are several ways to ensure your balance sheet is better organized and all expenses recorded consistently. For ideas on how to separate your finances, here are a few tips to get you started.

  • Get a Business Checking Account: Using a personal checking account for business purposes can make matters complicated. Open a checking account for your business at a local bank to handle your transactions. Using a separate account is the single best way to keep your work finances separated from personal income.
  • Apply for a Business Credit Card: Use a business credit card for work-related purchases and potentially earn some reward points in the process. When unexpected expenses arise, a business credit card is a valuable resource to have. Using credit will also make extra funds accessible for emergencies, such as when your budget is slightly overextended, or cash isn’t readily available.
  • Create a Budget: Develop a detailed budget for your business and allocate resources accordingly. Following a budget will help you better forecast payroll, overhead, or other costs associated with your business. Budgeting also helps keep your expenditures within a certain threshold from quarter to quarter, saving you money.
  • Consider Incorporation: An incorporated business is eligible for several tax benefits. For instance, an incorporated company can carry over losses from a previous year to reduce taxable income. Bear in mind that the tax liabilities for S and C corporations, LLCs, and other entities differ widely. Take the time to find the right option for your business.
  • Pay Yourself: Before setting money aside for expenses, make sure you are paying yourself first. This will help prevent any overlap between personal income and business. Paying expenses right away can become problematic, especially when several bills come due at the same time.

Seek the Assistance of a Professional

For additional guidance on managing finances, it’s a good idea to speak with a professional experienced in bookkeeping, accounting, or financial planning. Their insights and experience will help you make more informed decisions about separating business expenses from your personal income. Financial experts will also ensure your business is taking advantage of all possible tax deductions to help keep costs low.

If you’re having trouble handling the financial side of your business, it’s best to seek assistance. With professional bookkeeping and accounting support, your business will have a greater chance of generating higher profits in the future.

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