Untangling Personal and Business Spending Before the Year Closes
It starts innocently. You grab groceries on the business card because your personal card is in the other jacket. An online order is half printer ink and half birthday presents. The family phone plan has been on the business account since you started. Each one is small. By October, there are dozens.
So far in this series we've covered why messy books cost more than you think and how to reconcile your accounts. This week we're tackling one of the most common problems we see: personal and business money mixed together.
Why it matters more than it seems
Your deductions get shaky. Personal expenses in your business books aren't deductible. If the IRS finds some mixed in during an examination, they tend to look harder at everything else.
Your profit is wrong. Personal costs in your expenses make the business look less profitable than it is. Business costs paid personally make it look better than it is. Either way, you're making decisions from the wrong numbers.
Your liability protection can weaken. If you operate as an LLC or corporation, consistently mixing personal and business money can blur the line between you and the business. Your attorney can tell you more about how that applies to you.
Lenders notice. When you apply for a loan or line of credit, clean and separate statements make a much stronger case.
How to clean it up
Go through this year's business statements. Scan your business bank and credit card statements for anything personal and mark it.
Recode personal items, don't delete them. The money still left the business account, so it has to be recorded. Depending on how your business is set up, personal spending is typically recorded as an owner draw, a distribution, or a loan to be repaid. We'll make sure it's recorded the right way for your entity.
Find business expenses you paid personally. Search your personal card and account for business purchases: software subscriptions, supplies, mileage, meals with clients. Recorded properly, these can still count as business expenses, so you don't lose the deduction.
Settle on shared costs. Phone, internet, vehicle, and home office often serve both purposes. Decide on a reasonable business percentage and write down how you arrived at it.
Keep the receipts for anything questionable. A note on the receipt about the business purpose is worth its weight in gold if questions ever come up.
Setting up so it doesn't happen again
One account and one card, business only. A dedicated business checking account and a business credit card used strictly for business are the simplest protection there is.
Pay yourself on a schedule. A regular draw or paycheck is much cleaner than pulling money out whenever you need it.
When you slip, say so right away. Everyone grabs the wrong card sometimes. A quick note to your bookkeeper or in the transaction memo fixes it in seconds instead of months later.
Use bank rules for repeat transactions. QuickBooks can automatically categorize recurring charges, which cuts down on mistakes.
What it means for your business and your life
When business and personal money are separated, you know exactly what the business earns and exactly what's yours. Your tax return is built on solid ground. If a letter from the IRS ever arrives, you can open it without panic.
It also simplifies your home finances. When your household money isn't tangled up with the business, budgeting for your family gets a lot easier too.
What it takes to get started
Pull your business credit card statement for one month and highlight anything personal. If you find more than a handful, it's worth reviewing the rest of the year before December.
If that sounds like more than you want to sort through, we can go through it with you, recode everything properly, and set up a simple system to keep it clean from here on.
Who we are
Business Advisory Services LLC has helped small businesses across Wisconsin and surrounding states keep their books, payroll, and finances in order for more than 20 years. Through QuickBooks Anywhere, you and our team can work in the same QuickBooks file from wherever you are.
Ready to draw a clean line between your business and your personal life? Call us at 608-831-4900 ext. 801 or text us at 608-347-3010 or visit quickbooks-anywhere.com.
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