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5 Tips to Separate Business Expenses from Personal Expenses

August 31 2016

miq separate business personal expensesWhile independent business ventures like real estate can afford self-directed workers personal and economic freedom, that freedom can also cause individuals to mix their personal and business expenditures. While this practice does not in itself trigger an IRS audit, it can force you to employ guesstimation tactics when reporting business expenses to the IRS, and this can lead to tax woes and limit the potential for business tax deductions.

Use the following tips to separate business expenses from personal expenses and maximize your business tax deductions.

Be Contemporaneous, Not Extemporaneous

Just as it is wise to maintain mileage logs to document your mileage for the IRS, it is also wise to track expenses contemporaneously, or roughly as they occur, rather than impulsively filling in the blanks come tax time. Small expenses in particular are not likely to register in your memory unless you register them on paper through either bookkeeping software or a simple spreadsheet. Treat your expense logs as living documents that are updated at regular intervals.

Adopt a Business Mindset When Tracking Personal Expenses

Your financial mindset, as much as your behavior, can cause you to haphazardly track expenses. Oftentimes, diligent workers give business expenses the royal treatment in their budget, tracking business accounts payable with precision, but relegate personal expenses into a non-itemized, no-man's land of miscellaneous expenditures that can be identified as easily as a needle in a haystack. Track personal expenses with the same methodical, entrepreneurial instinct by which you track your business expenses.

Leverage Business Bank Accounts and Credit Cards

It can be difficult to track expenses when your outgoing funds for both personal and business purposes are pulled from the same pool of funds. Opening a bank account or credit card that is used exclusively for business purposes can help you mentally separate business expenses from personal expenses by diverging a single pool of funds into two distinct funding entities. This will ensure that you never blur the lines between business and personal expenses.

Be Your Own Payroll Administrator

Because agents often receive commission payments in more sporadic cycles than regular employees, they are often inclined to dip into their new checks as they receive them.

However, this behavior can prevent you from meeting important financial obligations like quarterly estimated tax payments. To fix this, serve as your own payroll administrator, discerningly allocating a percentage of your income to fund tax payments, monthly bills and your retirement or other savings goals. Knowing that you have put your business and on the path to a sound financial future, you can use the remaining funds to indulge in your success.

Judiciously Classify Expenses

To many self-employed workers, the IRS' definition of business expensesIRS' definition of business expenses may seem like a catch-all for any expense that could conceivably contribute to one's operational goals. However, erring on the side of caution and appropriately classifying business expenses is key. Recording expenses not simply as business, but with a secondary level of classification like entertainment, supplies, or travel can prevent your expense documentation from getting dinged by the IRS.

As you streamline the financial vehicles used to operate your business, MileIQ can help you maximize mileage deductions for business vehicular use. An automatic mileage-tracking app like MileIQ can not only help you isolate personal expenses from business expenses, but it can classify your business mileage with an extensive list of business drive purposes, such as customer visits, meetings, meals and more.

To view the original article, visit the MileIQ blog.