Step 2: Break out personal and business expenses
In the previous post, I made the point about the importance of separating funds with business and personal accounts. Now that you’ve done that, you should be categorizing your expenses. But there is often confusion or misinterpretation about what are “business expenses”. Let’s play a quick game of True or False:
True or False? On the way to a client meeting, you stop for breakfast at Dunkin’ Donuts. Business Expense? How about if you buy breakfast for the client also?
True or False? The fee for attending a networking event. And the parking. And the new outfit and shoes you bought for the event.
Did you choose F, T, T, T, F?
Tricky, right? Here’s the general rule – a deductible expense is one that is required for the operation of your business, and is considered both ordinary and necessary. Rent, office supplies, printing business cards, website design, networking events – you get the idea – that’s just a few. Here’s what not considered a business expense:
New clothes – unless you have to purchase a uniform for work that is ONLY worn for that job
Coffee, lunch, pizza, etc. when you’re out and about, even if you are in transit to a meeting with a client.
New tires for your car – unless the car is owned by the business and is only used for business reasons.
What about meals? If you are traveling for business – to a conference, for example, yes – they’re categorized as travel meals. Bought lunch for the office? Maybe but probably not a true expense. Bought dinner for the office because everyone stayed late to finish a project? Yes, business expense. Took a client to lunch? Yes – but make sure to keep the receipt and write the name of the client on it. It should also match a date in your calendar for that lunch meeting.
Speaking of receipts – keep them! Yes, all of them! Scan them and keep digital copies if you don’t want the clutter. There are a number of mobile apps that let you take a photo and store it right away.
Sorting through this topic can be overwhelming. Here’s a link to the IRS guidelines for business expenses to give you some more guidance:
So now that you’re keeping business and personal funds and expenses separate, how do you track the information? Where does it all go?
Next time, Now where do I put all of this stuff?