One of the most stressful parts about being a business owner is knowing how to financially separate your real life and your professional life. It can be a struggle to figure out how to draw a salary as well as reinvest in your business on a variable income.
In order to get the most out of your money, it’s important to understand the difference between tax deductions that are available for your personal life and those that are available for your business expenses. We’re here to help you get started on effectively managing both!
Keep your personal and business finances separate
The real key to managing your business expenses and your personal spending like a true boss is to keep your business finances and personal finances completely separate. Not only is separation helpful if the IRS ever comes knocking for an audit, but it also is great for your sanity.
Get started by opening bank accounts for personal and business use. Next, open a business credit card so that you can keep business transactions off your personal credit card. Avoid making purchases for personal affairs on the business credit card and vice versa. That way, you can scroll back through the business credit card statement and easily make a note of business expenses.
Many credit card companies offer cards specific to businesses, but you don’t have to have a card marketed as a business card to keep your spending separate. For example, if you have low overhead as a sole proprietor and aren’t looking to establish credit for your business yet, you can use a regular credit card for business expenses.
Let’s say you are thinking of making a big purchase for your business — like a new laptop to use for work. You decide to sign up for Chase Bank’s Chase Sapphire Reserve card and purchase your new work laptop with it, getting you about halfway to the spending amount needed for the card’s generous sign-on bonus.
Instead of opening the card for your personal use, you are using it for business expenses. This is especially handy if you do a lot of travel for your job. Certain travel rewards cards like the Chase Sapphire Reserve can offer perks like 3x points for travel and dining out (another frequent activity for some businesses, especially when traveling). While that card isn’t marketed for business, you can still use it to keep your business expenses separate from personal ones – at least for now.
Don’t waste your airline miles on business travel
It’s completely understandable to want to use your personal stash of miles to defray the cost of business travel, but don’t forget that travel for business is tax deductible! Though it may be tempting to dip into your personal airline miles for a business trip, you’ll get more bang for your buck if you save your airline miles for your personal use.
Instead of using your personal miles on a business expense, you can use your business card and earn even more miles while still securing a tax deduction. Plus, the best part is you can use all of those miles later for a fun trip!
Be careful not to confuse business and pleasure
Yes, you can often deduct the cost of entertaining clients or employees as business expenses. That includes both meals and fun activities. There is a fine line, however, between conducting business through wooing potential clients and just trying to invent a business expense on something you personally wanted to do.
Be sure to always keep your receipts if you plan to write something off as a business expense. You should also mark it on your work calendar and keep track of invitations, official guest lists, or RSVPs. That’ll help you further prove the legitimacy of expenses if the IRS asks for more confirmation.
Personal tax deductions to remember
Being a small business owner or entrepreneur can feel all-consuming – especially during tax season. It’s easy to get so caught up in your business self that you forget to account for your life outside the job. Don’t fall into that trap when it comes time to file your tax return!
Here’s a list of some personal tax deductions you should double-check to see if you’re eligible to claim:
- Charitable giving – get receipts for all charitable donations; each taxpayer can claim up to $300 for cash contributions in 2021
- Childcare (or dependent care) – a percentage of childcare expenses are deductible depending on your income
- Education credits – especially important if you’ve gone back to school to help in your business endeavors