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There are some things in life that go together well and others that definitely do not. You should not mix business and personal finances, as they fall into separate categories.  Although it may seem like a headache to keep them separate—who wants to manage all those bank accounts? Your life will be greatly simplified once you separate your personal and your business finances, especially your expenses.

Here are some tips on separating personal and business expenses.

Understand the difference between personal and business expenses

Most times, the line between personal and business expenses is clear. Any expense that is directly linked to your business earning an income is a business expense. If you buy something to be used for your business, it’s a deductible business expense. Buying something to use privately; that’s a personal expense.

When something is mixed between business and personal, such as a laptop that you use partially for business and partially for personal use, you can only claim a deduction for the amount that you use for business.

Whether you use something entirely or partially for business, you need to have a record of the purchase.

Open a business credit card and/or bank account

Having a business credit card and/or bank account provides you with an easy way to not only keep your private and business expenses apart, it also gives you an easy way to track your expenses. When you use the same accounts for business and personal purposes, you mix all transactions on one statement, making it hard to determine—or remember—which ones relate to your business and which ones are personal.

With business accounts you know that every transaction is related to your business and should therefore be deductible. You don’t have to search through every statement at tax time to highlight the deductible expenses because every transaction is business related.

You can also easily check your statements to see how much money your business is spending. That’s incredibly difficult to do if your business and personal transactions are all linked to one account.

Where possible, buy separate business items

If your business is small, you may struggle to keep all items separate, especially when you buy devices used for both business and personal purposes—this complicates things. In an ideal world, you have a separate computer for home and work, a separate work and personal cell phone and even separate vehicles.

Having duplicate items for work and personal use makes it much easier to track expenses. Rather than determining how much of your cell phone bill you can deduct for business, you know that your business phone is 100 percent deductible. Same with your computer and your vehicle. It costs more—especially the separate vehicle—but it keeps your personal life separate from your business life.

Final thoughts

It can be tempting to try to write everything off as a business expense but don’t fall into that trap. Open separate accounts, buy duplicate items where you can and keep receipts of your business expenses.

If you’re unsure, contact us to find out which activities count as a tax deduction and which do not. We can answer your questions and can even help you come up with a system to track your expenses.