How to separate your business and personal tax
It can be extremely easy, as a small business owner or sole trader, for your personal finances and business finances to mix up. But it is extremely important that they don’t in order to reduce financial headaches.
There are many major benefits to separating your business and personal finances. You will save time and money at the end of financial year, making your accounting simpler, and cheaper to complete. It can be difficult to track expenses in this situation, so separating your business and personal expenses can help you keep track, ensuring any audits or budgets are far simpler to complete.
With his separation of finances, you can track your business far easier. Your vision will be clear when reviewing your finances. So, you can see how your business is performing, and change course with far greater clarity. How can you achieve this, especially if your personal and business finances are already entangled? Here are 5 tips to get you started.
Open a separate bank account
The first thing you should do when you start your business is to open a separate bank account. It is one of the simplest, and most straightforward thing you can do to separate your finances. Every transaction made with this account will be for business purposes, at the same time any purchase made from your personal accounts must be for personal purposes.
With this, you will have clarity on money coming in and out for your business. No longer will it be mixed with other personal expenses you made.
To take this a step further, and get even more organised, consider having two separate business accounts. One will be for your regular business transactions and will be linked to your business debit or credit card. Your other account will be a business savings account. Here you set aside money for income tax and GST.
Digitise your receipts
It is vital that you keep, and organise your business receipts. You should also keep your business receipts separate from your personal receipts. This will allow you to avoid confusion, and save time when tax time comes.
The best way to store your receipts is to digitise them. This will keep them stored online, preferably on the cloud, so your accountant can access them and you don’t lose any. There are many great tools out there to help digitise your receipts and keep them safe. One of the market leaders is Dext (formerly Receipt Bank). Dext integrates with Xero and provides a safe place to store your receipts.
Purchase business items separately
Have multiple items, one for personal use, and one for business use. This could be two computers, two phones, or even two cars. This may seem crazy, but it does make keeping track of your business use far easier. Having one device for both your family computer and work computer can make working out business use complicated. After all how do you prove how much it is used for personal versus your business? Depending on your business’ scale it may be unfeasible for you to have a double up these items (cars can be expensive), so there is an alternative solution.
If you can’t have separate items, you can use other tools to track business usage versus personal use. There are tools for mobile phones or computers that you can use to track your time. This data can then be used to work out how much time was spent on business versus personal. For cars, you can use a logbook, keeping track of any business journey you make.
Set a budget
One constant trend for business owners, especially when starting out, is to borrow from personal finances in order to fund business purchases or keep the business running. While these situations are sometimes difficult to avoid, having a plan and setting a budget can reduce your reliance on these personal loans.
Set a clear budget based on your income. You should aim to not exceed this budget whenever possible, reducing your reliance on personal finances. Plan ahead as to where you will aim to gain extra revenue in order to afford future unforeseen costs or to expand your business.
Hire a professional finance expert
If you require assistance separating your personal and business finances, consider hiring a financial expert, like an accountant or bookkeeper. They can help you sort out your finances in order to create a more sustainable long term structure for your business. This will provide further clarity to your business’ finances, enabling pathways to future growth opportunities.
Separating personal and business finances is vital for all businesses. Not only will it save you time and money come tax time, it will also provide you with greater clarity on business performance. With this information you will have a far easier time growing your business. If you need assistance separating your personal and business expenses, reach out to Link Books.