Once you have found all the personal transactions throughout the current tax year, you need to identify how you would like them to be treated.Īs described earlier, the best practice is to amend your payroll reports and book the purchase as a fringe benefit compensation. Step 2: Classify your transactions correctly And to the same point, anything categorized as miscellaneous will very likely pique the IRS’s interest so be sure you categorize as much of your spending as possible. This step can be time consuming if your business has a lot of transactions throughout the year, but it’s incredibly important to be thorough here to ensure you’ve caught everything!įocus on these red flag areas the IRS is known to pay extra attention to: hotels/travel, meals/groceries, personal car payments, personal rent payments, home office expenses, cosmetics/clothes, entertainment etc. Un-Mingling Personal Expenses From Your Business’s Books to Avoid Tax Penalties & Interest:Ĭomb through your business financials and find every transaction that looks like a personal expense. The following step by step guide explains what you can do if you’ve mixed personal expenses into your business spending accounts, and are hoping to rectify the situation in retrospect. However, for many early stage businesses that ship may have already sailed. She goes on to elaborate on the importance of diligent record keeping and emphasizes how much easier tax season is if your business is organized and has a stellar bookkeeping system in place all year round. In a previous post, my inDinero teammate writes about what first time founders need to know about claiming small business tax deductions where she explains how the IRS defines what qualifies as a business expense: “The tax law requires business expenses to be ordinary, or common and acceptable in your trade or business, and necessary, or helpful and appropriate for your trade or business.”
How to mark personal expenses in quickbooks online how to#
If you’re just starting a business, you may be wondering how to tell the difference between personal and business expenses. But because so many fail or forget to do so, it is much cleaner and simpler to keep everything as separate as possible.ĭrawing the line between what’s personal and what’s business: Where this can get tricky: Making personal purchases (like a haircut) on a business account is not a problem as long as you include the spending in your payroll as a fringe benefit. Suggested Reading: 7 Accounting Tips for New Small Businesses In this scenario, once the IRS caught this kind of spending, they would treat this as disguised compensation, which would be subject to payroll taxes and potential interest and penalties owed down the road.
You cannot deduct items like a haircut, a trip to the salon, or new clothes as a business expense, even if it is to look fresh for an upcoming business meeting. (For more on fringe benefits, be sure to check out The Ins and Outs of Fringe Benefits – What Is Non-Taxable?on HR and payroll provider, Justworks’ blog.) The IRS’s Employer’s Tax Guide to Fringe Benefits defines a fringe benefit as “a form of pay for the performance of services.” In their eyes, this personal expense is just as much a form of compensation as their salary. Instead, if you were to purchase personal items through a company account, they should be fringe benefits that are subject to payroll taxes. This is known as “commingling your books” and is a huge no-no as well as one of the most common ways businesses find themselves on the barrel end of an IRS or state audit.Īccording to the IRS, personal expenses are not eligible business expenses deductible against taxable income.
One of the most common problems we see from startup founders who are first moving away from DIY accounting is a wide range of “personal transactions” being made with the business accounts.