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5 Tips for Separating Your Business and Personal Finances

Aug 28, 2015 11:58:00 AM / by Brian Paulson posted in small business accounting

Mixing business and personal finances is a major problem for small business owners. Not only does it create headaches at tax time, it also makes it difficult to track the profitability of your company. Worst case scenario? You get audited by the IRS and end up with major fines.

Keeping these two parts of your money life separate is essential to preserve your sanity and to ensure you have a sustainable business model. Here are five tips to help you divide the two.business_and_personal_finances

The Five Tips

1. Maintain separate checking accounts.

Having separate checking accounts is important in case the IRS ever questions whether your company is just a hobby or a legitimate business.

2. Use different accounting systems.

There are a number of accounting systems available to small businesses. Whichever you choose for your business, try to use a separate one for your personal accounting. That way you won’t have to puzzle over which expenses go where. Having them in separate places will simplify your end-of-year filing and give you easy access to your expense reports in case you get audited.

3. Get a business credit card.

Like a separate checking account, a business credit card helps justify your business expenses to the IRS if you're audited. Plus, you may get an extra tax deduction by using one. The interest from a business credit card is actually a tax deductible expense and can help lower your tax burden.

Download the Small Business Accounting Kit

4. Set up a limited liability company (LLC) or an S Corp.

For many businesses, it makes sense to become an LLC or S Corp. Taking this step is the ultimate way to protect your personal finances and give you liability protection, which is useful in case your business gets sued.

5. Create a home office.

Having a home office makes you eligible for a great tax deduction, but a lot of business owners are afraid to take this deduction in case they get audited. You don’t need to worry as you set up your home office the right way. Make sure it’s used exclusively for your business; it can’t double as a guest room. As long as it’s legitimate, this is a fantastic deduction for your company.

Ready to learn more?

Following these tips for separating your finances will help prove to the IRS that your business is really a business. It doesn’t take much to create this distinction and protect you from any legal hassles.

If you want to learn more about managing your personal and business finances, give us a call at 952-927-4011 or request information on our services here.

 business profitability checklist

Image by Niklas Bildhauer via Flickr, licensed under CC BY-SA 2.0.

Brian Paulson

Written by Brian Paulson

Brian began working at CSI in 1996, and he purchased the business in 2002. As Owner, his primary role is in the management and growth of the firm. Since 2002, the firm has more than quadrupled in size. In 2009, Brian started CSI’s payroll service to complement CSI’s accounting and tax services. Brian received his Bachelor’s degree from the University of North Dakota, with a double major in Accounting and Financial Management. He’s a member of both the National Society for Tax Professionals and the National Society for Accountants, and he serves on the board of directors for the Professional Association of Small Business Accountants, where he was once president. Brian also serves on the business advisory council for Opportunity Partners, an organization that helps people with disabilities find employment. He’s also contributed to several business books, including Six Steps to Small Business Success and The Lean Mean Business Machine. Fun Fact: To help put himself through college, he used student loans, delivered pizzas, and worked summers in a salmon processing plant in Alaska.