If you are self-employed, you must keep your personal and company finances separate for the purposes of Schedule C taxation. Money generated (net business revenue) becomes your wage, while the time spent, as well as the materials and equipment bought or needed to achieve the outcomes, are categorized as business costs.
Similarly, if you are employed by a firm but also incur business expenditures, you must keep receipts for reimbursement or deduct the expenses for qualifying goods from your gross income on Schedule A, under work expenses and miscellaneous expenses.
Consult with tax specialists before making any decisions. If you follow the tax laws, you will save money and will not have to worry about an audit.
Separating them is necessary in order to determine whether or not you are earning any money from your company venture. When personal costs are included, that capacity is obscured. Additionally, the tax authorities will only want to examine taxable information.
Keep track of your expenditure and exercise proper budgetary control over it. If you are obliged to maintain a trust fund, such as a realtor, you must maintain separate money for your clients, as well as a separate account for the day-to-day operations of the firm.
Separating personal funds from corporate finances is a very simple process. First and foremost, be certain that you have two bank accounts: one for company transactions and another for personal expenses.
Alternatively, if you need money to purchase a personal item and the funds are in your company account, move the funds to your personal account (this can be structured as a draw, a loan, or other payment to you as owner.)
Second, make sure you have at least two credit or debit cards on hand: one for business purchases and another for personal use. You should only make payments on your company credit card from your business bank account, and you should make payments on your personal credit card from your personal bank account. Money may be transferred between bank accounts as required.
When I dealt with small company owners, several of them struggled to keep their business and personal accounts distinct because they kept accidentally using the incorrect ones. Here are some of the measures they put in place to help them remain more distinct in their thoughts.
Open bank accounts with a variety of financial institutions. However, although this makes transferring money between accounts more difficult, it is worthwhile to avoid accidentally putting a client payment into your own account.
Ensure that your company credit card(s) are kept in a distinct location in your wallet from your personal credit card(s) (s).
Use a different sort of credit card for business (for example, Visa) and a different type for personal purchases. Alternatively, use two Visa cards from separate financial institutions.
Placing a sticker or other identifying mark on one of your cards will allow you to tell which one is which.
It is unnecessary to gather and evaluate each and every spending/revenue from bank statements if you have separate bank accounts and plastic money such as debit cards or credit cards, which allows you to retain a distinct part of such financing.
For example, a separate bank account for company spending and a credit/debit card for business expenses is recommended. Your personal account and credit cards should not be used to fund company costs, and the same is true of your checking account.
The amount that should be withheld from the company every month should be predetermined since the household’s expenditures must be covered. Set up a second, distinct personal account that will only be used to cover costs that are strictly personal in nature.
In addition, by following this procedure, the amount of money that is taken out as a withdrawal will have no impact on the business’s profit and loss statement; moreover, the separation of accounts from bank statements will finally give clarity and appropriate maintenance.
Meet Krishnaprasath Krishnamoorthy, a finance content writer with a wealth of knowledge and experience in the insurance, mortgage, taxation, law, and real estate industries.