Keeping your business records well organized is an important, but often time consuming practice. Busy professionals often tend to make filing paperwork and tracking receipts a bottom-of-the-to-do list item. Most of the time it is simply because following up with a customer or providing services is critical to building a business and so that’s where most people concentrate their efforts. After all, how exciting is recordkeeping anyway? But disarray can waste time & money.
A lack of attention to recordkeeping is always readily apparent at tax time. One mistake that can make it more difficult to prepare your taxes and also will cause problems with the IRS if you are audited is to mix personal and business expenses together. Personal and professional records should always be kept separately. Small business owners, especially those operating as sole proprietors, can fall into this trap easily and often don’t appreciate the significance of this issue.
Mixing personal and professional recordkeeping can also create problems for business owners who want to qualify for either personal or business credit. And in a worst case scenario, mixing the two sets of records may, in certain circumstances, allow creditors to go after business assets to satisfy personal debts or vice versa.
Taking the time to put systems in place to separate your personal and professional records is an important business practice that can save you money and trouble down the road. It’s a form of financial risk management that is worth getting right from the start.
Here are some simple steps to keep you on the right track.
Use Separate Bank Accounts
By separating your personal and business bank accounts you set the foundation for keeping transaction records separate. Using the account’s debit card will allow you to track business expenses easily, too, but keep an eye on the balance to avoid expensive overdraft fees. Don’t pay personal bills with business checks or pay business bills with personal ones. The point is to have an easy way to show and track personal vs. business revenues and expenses.
Use Separate Credit Cards
Getting business credit cards is an easy way to separate out expenses, but it’s difficult to obtain credit when your business is young. In the beginning, you may have to personally guarantee the credit card, but if you use it only for business purchases, you’ll be able to easily track your business expenses. Personally guaranteeing business debt can be risky to your personal financial health, so as soon as the business is able to qualify, obtain a credit card that does not require a personal guarantee.
Separate Your Electronic Records
Bookkeeping software comes in both business and personal versions, depending on your needs. Some businesses will want to use different software programs for personal and business accounting, but it’s possible and perfectly okay to use the same software for personal and business accounting. Just make sure that the company file is kept separate from your personal one. A positive byproduct of using software will be that you can easily pull the information needed at tax time for your accountant.
Track the Business Use of Dual Purpose Items
If you work out of the home, to the extent possible, your work space should be separate from your personal space. This is especially important for claiming home office deductions. For equipment that is used both personally and in your business, you need to have a way to track the business usage. For example, if you use the same computer or car for both work and pleasure, you need to document the business–use portion in some way; such as time or mileage.
Make it Easy to Track Business Receipts
If you’re using business credit cards, write the business purpose on the back of the receipt at the point of purchase. It will make it much easier to remember later & you won’t have to try to decide if the cost of dinner is tax deductible or not. Have someplace to collect receipts that is easily accessible – something as simple as a file folder or basket will work – so that when you get home or back to the office you can deposit all those receipts & easily find them later.
These are easy steps to take that are effective at helping you to keep your personal and business expenses separated. Keeping your finances straight is part of building a successful business and it will help insure that you have an accurate financial picture of what is going on in your business as well.