Keep Business and Personal Spending Separate

You’ve probably heard it is a good idea to keep business and personal spending separate. There are some very good reasons for that.

But It’s So Convenient

One of the primary ways that people get business and personal expenses mixed together is through the use of a credit card for both kinds of activity simply because it is convenient. Perhaps you have a business credit card and one day while you’re out you realize you need to make a personal expenditure and it is the only credit card on you. What do you do? Well, the tendency is to use the business credit card, but I encourage you not to do that. Yes, you may reimburse the business but there is always the danger you will forget to do so. Additionally, anytime you make this a practice, even if only occasionally, you run the risk of raising red flags with your accountant or worse yet the IRS. This may be an encouragement for the IRS during an audit to dig deeper and begin to challenge other spending on the credit card as really being personal. Let’s be realistic; there are some things bought by a business that provide both a business and personal benefit, so tread lightly here. Be conservative in whether you classify something as business or personal. If you have a business credit card use it only for genuine business purchases. If you need something personal and don’t have a personal card on you, come back later but don’t use the business credit card. This will really help you to keep business and personal spending separate and save you trouble down the road.

The Personal Card

There are at least a couple of issues that come up with the use of a personal card. Perhaps you don’t have a business credit card and have to resort to the use of a personal card. Here is my recommendation. Pick one personal card and use it only for business expenses. That way the company merely reimburses you for the spending on the card or directly pays it and it will only be for business expenses. There is of course the possibility that you only have one credit card and it is a personal one. In that case, you must use extreme care in charging any business expenses to it. Make sure you document thoroughly anything that is for business and submit a full report for reimbursement. Make sure the receipts for the spending are maintained with the business records. But, really, if you find yourself in this situation you should do your best to minimize the use of the personal credit card. I recognize that it is sometimes unavoidable, but if this is going to be a recurring event then I encourage you to get a business card, even if it only has a small line of credit and you actually have to pay it more frequently than once a month to stay within the limit.

Other Areas of Concern

It is not just credit cards that can get you in trouble by failing to keep business and personal spending separate. For example, it is fairly common in a small business that a line of credit is actually a personal line of credit. If the line of credit is for business purposes then use it only for business. The same concerns apply here as to credit cards. Do not be use the line of credit to make personal purchases. If it is only for business then the business can pay the line of credit when due and keep all the documentation as support. However, if you also have personal charges on the line of credit you create a more muddled picture. I recall a situation where a business owner was using the personal line of credit for both business and personal purchases while maintaining that it was only being used for business. A little digging proved that not to be the case.

So what about your company? Are you diligent about keeping expenditures for personal and business separate? If not then it’s time to start doing so.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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