Keep It Legal, Keep It Separate:
Tax Tips For Small Businesses
In order to take the tax write-offs available to a sole proprietorship, partnership, or LLC, you will need to keep your business files and home files completely separate.
In addition to paperwork, you will also want to keep your office and computer separate.
Being Careful With Write Offs
Many people think they should pay for every questionable borderline expense from their business checking account so they can write it off. That is not a good idea for several reasons:
- It is unethical to take business deductions for personal expenses
- It is illegal
- There is no guarantee that the IRS will accept the business check you wrote to the Office Supply Company for the pencils, notebook paper, and day-glow glue you bought in September for your kids.
- You will not know exactly how much your business is earning and spending.
Separate Business Accounts Form Personal Accounts
Keep your business checking account clear of unrelated income is essential. If you need to fund your business with cash from your personal account, always do it by depositing a check that you can show in an audit.
If a relative gives you a financial gift for Christmas, deposit it in your personal account and then write a check to your business account.
Otherwise, an auditor might view those deposits as undeclared income.
Office Deductions - What Is On Your Computer?
Another area when you probably want to separate business and personal matters is your computer. The best answer to this is to have two computers.
Give your old computer to your family for personal use, and get a new computer that is strictly a business computer.
If you do this, you will not have to keep a log of your computer time; it will be assumed that it is strictly a business computer that is fully deductible or depreciable.
Additionally, you will have a backup computer to use if your business computer dies.
If you only have one computer in the house, you will have to keep a log of your business and professional use, in order to write off your business percentage.
Nevertheless, beware. Provide a log that shows you used the computer in your home office 98 percent for business and two percent to do a database of your music collection, and you can lose your entire home-office deduction.
Business Credit – Not Your Credit
It is also a good idea to have a separate business credit card, for the same reasons as the business checking account.
Doing so provides a clear record of business-related expenses. Some people prefer paying the extra fees for an American Express card for their businesses; it provides an extra set of receipts in the monthly statement so expense reports are easier to compile.
You should also consider having a gasoline card in your company name and have all fill-ups, maintenance, and repairs done on that card.
People who use their cars for business can compile a higher level of deductible expenses if they track their real auto costs instead of just taking cents-per-mile deduction.
Although it may be difficult at times to keep your business and personal finances separate.
However, it is worth the effort. It will make business planning and tax filing a lot easier for you.
Next Chapter:
Chapter 7 - Business Insurance
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