April 23, 2024
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Practical Tips for Paying Personal and Business Expenses

Commingling business and personal funds is a dangerous game. Think of it like this—most likely, a major reason why you incorporated your business was for liability purposes. Incorporation protects you individually from liability in various situations. In these situations, business creditors can only touch the assets of the corporation while your personal assets remain protected.

When you break from this formality and use business funds to pay for personal expenses, then you are destroying the wall that protects your personal assets. Because you no longer act as separate entities, the courts won’t treat you separately and may allow creditors to go after your personal assets.

That’s why your business and personal assets and expenses should stay as far away from each other as possible and never mix. Think of them like oil and water. Like politicians and the truth. Like loose-fitting pants and high school boys. Like World of Wings and a dead beetle that’s not dressed in rhinestones and acting out a wedding scene. Like vodka and good life decisions.

You may think that you would never do such a thing, but the truth is, you may be doing it accidentally. Especially when you’re handling both your personal and business expenses, it’s easy to get sloppy and do the wrong thing unknowingly.

As a general rule, it’s always best to keep everything as separate as possible. Pay the business expenses with a business account and pay personal expenses with a personal account. The problem is, sometimes this isn’t very practical. Sometimes you have mixed-use expenses that have a component of both business and personal.

For example, let’s say you have a home office. You can deduct a portion of the utilities as a business expenses. But it’s not practical to send the utility company a personal check for the personal portion of your bill and another check from your business account for the portion allocation to the home office.

If you run your business as an LLC (when it’s treated like a corporation and not a disregarded entity), S Corporation or C Corporation, you will need a strategy to handle these mixed-use expenses. We’ll discuss the three most common mixed-use expenses and what your strategy should be when paying these expenses.

Reimbursement

The critical strategy to all of these expenses is reimbursement. You have two options to handle expenses when there is both a personal and business component:

Pay the expenses from your personal account and reimburse yourself from your business account.

Pay the expenses from your business account and reimburse the corporation from your personal account.

There’s no alternative to reimbursing one way or the other. It may seem tedious, but the good news is that you are getting a deduction you would not otherwise get. So, the bright side is that Uncle Sam is paying you for the effort.

But, hopefully, with the strategies below, this process will be a bit more effortless.

Home Office

Your home office is the ultimate mixed bag of personal and business expenses. You have utility bills, rent, property taxes, insurance, etc. All of these expenses have both a personal and business component to them.

While you may pay home office deductions from either a personal or a business checking account, I recommend you pay these expenses from your personal account. The reason being that you can use Tax Form 8829, the home office deduction form, as a guide for your reimbursement.

The form has built-in allocations that make it easy to separate out the business expenses from the personal. You simply fill out this form and hold on to it for your records. The business will then reimburse your personal account for these expenses.

Practical tip: To make it easier for you, you need only submit this expense on a monthly basis or even at year-end in December. This cuts down on the time spent constantly submitting expense reports and reimbursing.

Cell Phone Expenses

Another category of expenses that contain both a personal and business component are cell phone expenses. As we evolve into an increasingly mobile working world, our cell phones are critical to running our businesses. But, at the same time, we all use our cell phones for personal calls and emails as well.

The strategy you implement for cell phone expenses depends on your entity structure. If you’re a single-member LLC, then you may only deduct the business-use portion of the bill.

This could be a huge pain. Imagine going through your cell phone bill every month and identifying which calls pertain to business and which were personal. It makes it a little better that the IRS allows you to go through this process for a smaller sample, say three months or so, as long as that time period is an accurate representation of the full year.

Practical tip: Forget this painstaking process of sifting through your calls and get a second phone number on your cell phone. There are now dozens of providers, including Grasshopper, eVoice and Line2 that allow you to add a second phone number. By using the second phone number exclusively for business you can easily identify your business usage and reimburse yourself from your business account.

It’s a whole lot easier if you run your business as a corporation. If you pay a flat fee each month, the corporation can pay the entire bill and get a business deduction, even if you use it for personal calls as well.

Car Expenses

Tax law allows you to choose one of two methods for car expenses related to your business. One option is to simply deduct the IRS Standard Mileage Rate for each business mile driven (54 cents per mile for 2016). The other option is to keep track of your actual expenses related to the car, such as gas, car washes, repairs, tolls, parking, depreciation, lease payments, license and registration, and garage rental.

If you use the actual expenses method for your vehicle deductions, it’s easy to imagine how all that paperwork can add up. If you were to hold on to every receipt for car washes, gas, parking and tolls, then you would have a whole lot of paper to deal with.

Luckily, tax law doesn’t require you to substantiate your expenses for less than $75. But without receipts, what’s the best way to accurately reimburse yourself for the correct amount?

Practical tip: Simply make a vehicle diary and put in an entry with the necessary information including how much you spent and what it was for. At the end of each month you just add up the amounts in the diary and make the appropriate reimbursement.

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether it’s tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.

 By Daniel Magence, CPA, Esq.

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