Keeping business and personal expenses separate is key to clean business documentation. Personal purchases still sneak in from time to time (or more often than you intended), and that can leave you uneasy about what comes next. A few simple changes make this manageable, and they will have you ready for tax season.
Disclaimer: these thoughts come from our experience and opinions. Always consult your tax professional about your specific fact pattern.
Receipts
Yes, you need to keep all of your business receipts. The IRS will not accept a bank statement or credit card statement as substantiation for an expense. You need the actual receipt, or a picture of it.
Option 1. Buy a fan folder for each year and file receipts in each divider by month. If you are ever audited and need a receipt from April of a given year, you can go back and find it.
Option 2, our favorite. Use the QuickBooks Online app's receipt capture. After a purchase, open the app, photograph the receipt, and throw the paper away. QuickBooks reads the receipt and matches it to the transaction that already pulled in from your bank or card. During review it asks: "You have a charge at Lowe's for $323.34 and a receipt from Lowe's for $323.34. Should we match these?" Click yes and QuickBooks stores the image with that transaction forever. If you ever need to produce a sample of receipts, search the transaction and hand over the image.
You can also set up an email address through QBO (YourCompanyReceipts@qbodocs.com) and forward electronic receipts. They file away the same way. We use this for our own business.
Personal versus business expenses
Business owners must keep business and personal spending separate. The easiest way: a dedicated business bank account, plus business credit cards if applicable. All business income and expenses run through business accounts, and all personal spending runs through personal accounts. Once you reconcile the business accounts, you know every business transaction is captured, with no digging back through statements.
There are several clean ways to move business profits to your personal accounts. A sole proprietor can transfer from the business account to a personal account, then spend personally from there. Commingling carries legal risks worth discussing with your attorney. And in an IRS audit, personal expenses inside a business account get treated as personal (not deductible) unless you can prove business purpose. Without a receipt or adequate substantiation, that can be detrimental.
Also separate income and expenses by activity. Say a husband is self-employed in construction, runs a second business managing rentals, and his spouse works as an interior decorator. Do not combine the money from those activities. Give each one its own bank account, and run each activity's income and expenses through its respective account. At year end, reconciling each account gives you near-perfect books by activity.
Don't let year-end worries sink your holidays. We would love to talk about how we can help you get ready to tackle the new year. Reach out to us today.
