Tax Deductions: Business vs. PersonalPosted on November 27th, 2017
When you’re a small business owner, there are times when your personal life and finances are closely connected, especially if you work out of your home. But for tax filing reasons, it’s important to consider business and personal funds as inherently different.
For help untangling your finances, consider the following tips:
Create Separate Bank Accounts
Bookkeeping processes are complicated enough as-is, but when you do not separate your personal receipts from those associated with the cost of business operations, determining the source of money can become even more difficult. To keep expenditures as clearly delineated as possible, create separate bank accounts for business and personal funds. Do not pay for home supplies with your business card and vice versa. This way, your bookkeeper will be easily able to determine which expenses can be written off to benefit your tax plan.
This will also prevent long phone calls with your accountant at the end of the month, which typically involve pouring over paperwork, in an effort to determine which expense was applicable for the business and which was spent on personal needs. And, as is very common, if you wait until the end of the year, this task is all but impossible.
Closely Evaluate Home Office Space
If you run your business at home, you should be aware that the IRS is precise about deductions in this particular circumstance. Determine the square footage devoted to your business space and ensure that it is used for business operations only. If the space set aside for your company also occasionally serves as a child’s play space or a home gym, for example, it cannot be considered an office. Carefully separating the business and personal in terms of physical space is vital for determining what part of utilities and mortgage are allocated for operating the specific business space.
Evaluate Ordinary and Necessary Expenses
Some purchases are vital to business operations or employment. These include software and even sometimes clothing if you require a uniform. However, be careful to consider how these items are being utilized. If you purchase QuickBooks for routine bookkeeping operations, this could be considered an Ordinary and Necessary Expense which is a tax write-off. However, if you purchase TurboTax to handle personal returns, this is not an expense you can include in a tax document. The same goes for office-appropriate business attire; suits are not the same as a uniform and cannot be written off in the same manner.
Ask our Business Accountants about your Tax Return
Every business owner wants to take advantage of the most tax credits available to them. The best way to do this is to work with a professional accounting firm. At the Accounting Office, Inc. we provide year-long accounting support and business tax filing to ensure you get the most out of your tax return. Ask us what we can do for you!