Last Updated January 29, 2025
Understanding how to separate business and personal expenses is an important accounting responsibility for small business owners. All too often, business and personal expenses are mixed, creating detrimental and time-consuming complications. This typically leads to headaches come tax reporting season and opens the owners up to potential liability issues.
It goes beyond opening a business bank account, too. Entrepreneurs need to know what constitutes as a business expense, how to reimburse yourself for personal funds used for your business, how to effectively track expenses, and other tips that will help you save money when completing your tax reports.
By understanding the difference between business and personal expenses and following crucial guidelines for keeping them separate, small business owners can ensure smooth year-end accounting processes come tax season. Knowing this, let’s talk about separating personal and business expenses.
What Are Business Expenses?
Business expenses are generally defined as any tax-deductible costs that a business incurs as part of its regular operations. Some of the most common types of business expenses include:
- Rent
- Payroll
- Insurance
- Equipment and inventory
- Office supplies
- Employee wages
- Employee benefits
- Lodging for work-related trips
These expenses may be fixed or variable. For example, rent is a fixed expense, as it typically doesn’t change from month to month. Other expenses may fluctuate over time, like fuel costs, inventory costs, or purchases linked to specific business growth initiatives.
What Are Personal Expenses?
Personal expenses refer to any costs you incur as part of your day-to-day living. This could include your:
- Groceries
- Rent or mortgage for a home office
- Personal travel
- Personal cell phone bills
- Clothing
- Entertainment
These are expenses that only affect you—not your business operations. Personal expenses in business are rare but typically only involve using personal items for business purposes (such as using a personal cell phone for business calls or running your business out of a home office).
For example, consider travel expenses, business vs personal. Travel for a work conference would count as a business expense. This expense could be paid with company funds or reimbursed by the company. Travel for a family vacation is a personal expense and would not be reimbursable.
Why Separating Business and Personal Expenses Is Important
Mixing business and personal expenses is never a good idea. This primarily comes down to taxes. Understanding how to separate business expenses for taxes will make it much easier when the time comes to file taxes.
If your personal and business expenses are all mixed up on the same account, you will have to manually dig through your expenses and income to separate them. This can be extremely time-consuming, and if you don’t know how to separate expenses for taxes properly, it could leave you at increased risk of an audit. Separate bookkeeping will save time and energy while also keeping you compliant with tax guidelines.
Another reason to separate business vs. personal expenses is to ensure greater legal protection for your personal finances. Mixing your funds can reduce your legal protections if your business faces significant financial liabilities. This can also make your personal assets vulnerable to business lawsuits or debt-related issues.
How to Separate Business and Personal Expenses: 11 Tips
The following small business accounting tips will help you keep your business and personal expenses separate so you can avoid tax and liability complications.
1. Create a Separate Legal Entity For Your Business
Before you open business financial accounts, you typically need to create a separate legal entity for the business. Most states require that you file with the secretary of state to create an LLC, C Corp, or S Corp. Make sure you understand your state’s filing requirements and which structure applies to your business.
2. Get a Business Tax ID
As part of creating a legal entity for your business, you should apply for an employer identification number (EIN) with the IRS. This nine-digit ID is used to identify businesses for tax purposes. Many banks require an EIN to open a business account, which is essential for separating personal and business expenses.
3. Open a Separate Business Bank Account
With a separate legal entity and an EIN, your next step is to open a business bank account. This will make it much easier to track your business’ cash flow and prepare your three essential financial statements. More importantly, this will help ensure separation between your personal and business expenses.
4. Obtain a Business Credit Card
Obtaining a business credit card should also be a top priority for managing day-to-day business payments (such as small supply orders that you wouldn’t pay for via ACH transfer). A separate business credit card ensures you don’t have to dig through your personal credit card statements and receipts to find your business expenses.
5. Record All Business Transactions
Even with a business bank account and business credit card, you should still carefully record and organize all business transactions. This includes both expenses and income. Accurately recording this information will help you create business balance sheets, cash flow statements, and more so that you can have a clear understanding of your financial situation. You can record this information using a digital spreadsheet or accounting software.
6. Streamline With Accounting Software
The best business accounting software will greatly simplify the process of separating personal and business expenses when you use a business bank account and credit card. This software can be configured to automatically record transactions from linked accounts, reducing the risk of manual error and helping you stay on top of other responsibilities like taxes and invoices.
7. Pay Your Salary From Your Business Account
When running a solo business, it can be tempting to have your income go directly to your personal bank account. But with an established business entity, you should instead pay a salary to your personal account from your business account. This allows you to treat your salary as a business expense on your profit and loss statements while also giving your business greater credibility and protecting you from personal financial liability.
8. Track the Use of Personal Items in a Personal Business Expenses Spreadsheet
Depending on the nature of your work, a personal business expense tracker may also be useful to track the expenses you incur when you use a personal item for business purposes. This is especially common for small business owners who might use their home internet and cell phone for both personal and professional use or use a personal vehicle for work travel. Tracking the business use of these belongings will help you write off appropriate deductibles during tax season.
Record personal expenses that are not related to the business elsewhere so as not to create confusion.
9. Create Separate Online Accounts
If you plan to use online accounts such as Amazon or PayPal for your business, make sure that you create new accounts that are separate from your personal accounts. This will make it easier to track expenses and avoid mixing up business and personal purchases.
10. Immediately Reimburse Yourself for Personal Money Used for the Business
It’s not unusual to encounter situations where you forget your business credit card and need to use your personal credit card instead—such as when traveling to a work conference or taking a client out to lunch. In this situation, keep your receipts and reimburse yourself from your business accounts, noting what the business expense was. This helps ensure that business expenses are accurately tracked and accounted for.
11. Regularly Reconcile Bank Statements
You should reconcile your business bank statements with your own financial records each month. This can help you identify potential errors in your own records, as well as situations when you may have used a personal account to pay for a business expense by mistake. This will help ensure the accuracy of your financial records and allow you to correct any crossover between personal and business expenses.
In-Summary: Separating Business and Personal Expenses
Understanding how to keep business and personal expenses separate is a critical component of business accounting. Creating a clear distinction between these expenses will simplify taxes, improve your bookkeeping, and offer protection against personal liability for business debts and lawsuits. By creating separate bank and credit card accounts, carefully recording and tracking personal expenses vs. business expenses, and paying yourself a salary out of your business account, you can maintain the right level of separation.
Separating Business and Personal Expenses FAQs
How do I record business expenses paid with personal funds?
The best way to record business expenses paid with personal funds is to create an expense claim and then reimburse your personal account with money from the business account. Make sure you keep the receipt associated with the purchase.
Can I use a business credit card for personal expenses?
Using a business credit card for personal expenses may not be illegal, but it isn’t a good idea. This may violate the terms and conditions of the card issuer while also complicating your ability to accurately track and record business expenses when filing taxes.
Can I use a personal credit card for business expenses?
Using a personal credit card for business expenses can be done, but it isn’t recommended. Using a personal card can make tax reporting more difficult. It can also blur the line between your personal and business expenses, leaving you personally liable for business liabilities.
Can I deduct business expenses from my personal income?
Business expenses paid with personal funds can be deducted from your personal taxes in certain situations, most commonly for solopreneurs and small business owners. Personal business expense deductions include home office expenses, business supplies, travel, and professional fees, depending on how your business is structured and how you pay for them.
Can I claim business expenses on my personal taxes?
Claiming business expenses against personal income can be done by filing Form 1040 Schedule C. This option is available for solopreneurs who run an LLC or sole proprietorship.
Can I use a business line of credit for personal expenses?
Using a business account for personal expenses is never a good idea. This could create additional tax liability for the business, cause the line of credit to be reclassified as a personal line of credit, or open you up to financial responsibility for any business liabilities.
What should I do if I accidentally used a personal credit card for a business expense?
If you accidentally use a personal credit card for a business expense, document the expense with receipts and other available information. Provide this information to your company’s accounting department and file an expense claim so you can receive a reimbursement on your card and have the transaction accurately recorded as a business expense.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
