One of the most stressful parts about being a business owner is figuring out how to financially separate your real life and your professional life. As a full-time writer and speaker, I initially struggled to figure out how to draw down a salary and reinvest in my business on a variable income.
More importantly, I needed to understand the difference between the tax deductions available for my personal life and my business expenses. Here’s what helped me start 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 a 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.
Like many money nerds, I like to churn credit cards to get points for travel. Chase Bank released its Chase Sapphire Reserve card around the same time I struck off on my self-employed journey. At the time, I needed to buy a new laptop for work, which got me about halfway to the spending needed for the 100,000 points sign-on bonus.
Instead of opening the card for my personal use, I decided to use it for business expenses. I do a lot of travel for my job, and the card earns 3x points for travel and dining out (another frequent activity for my business). While that card isn’t marketed for business, it’s still what I use to keep my business expenses separate from personal ones – at least for now.
Don’t waste your airline miles on business travel
I completely understand the urge to use your personal stash of miles to defray the cost of business travel. This year I took a trip to Portland, Oregon for a conference that happened to be the same week as the eclipse. Flights from New York to Portland were running a little over $700, but I could’ve covered the flight with my miles. The thought of spending $700 on airfare when I could get to Europe for that price made me a bit hesitant. But I forced myself to consider the fact the travel is tax deductible as a business expense.
Instead of using my personal miles on a business expense, I used my business card and earned even more miles while securing a tax deduction. Plus the best part is I 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. We so often focus on our business selves that we forget to account for our lives 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:
- Student loan interest – deductible up to $2,500
- Charitable giving – get receipts for all charitable donations
- Child care (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