Your business card doesn’t make a purchase automatically deductible.

(That would be cool though)

People say it all the time, “If it’s for the business, it’s a write-off!” I wish that were true. But that’s bad advice.

Together we’re going to break down the difference between a business expense and a tax deduction (spoiler, they aren’t the same thing), and focus on why it’s important to separate your business and personal finances.

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Not every business expense is considered a tax deduction.

A common myth about business expenses is that “everything is a write-off.”

Unfortunately, that isn’t the case.

Before we dive into the why, let’s figure out the difference between a business expense and a write-off (or tax deduction).

Business Expense vs. Tax Deduction

A business expense is a general term for a cost associated with running your business. This can include rent, subscriptions, software, tech, payroll, utilities, materials, maintenance, etc.

A write-off (or an expense that is tax-deductible) is what the IRS says you can deduct from your taxable income, which lowers your tax bill. Sometimes it’s the entire amount or just a piece of it.

As a bookkeeper, I don’t review your expenses to calculate your tax deductions (I’d rather be head down in a pretty spreadsheet) but we do keep an eye on what you’re spending to make sure they are legitimate business expenses, and you’re not spending business money on personal items.

It’s your CPA’s job to calculate the deductions based on your expenses that your bookkeeper has organized and prepared for them.

But Jen…. “Who cares what I swiped my card for? The money is in the bank. It shouldn’t matter.”

Sadly, the IRS doesn’t see it that way, so as a bookkeeper, I like to help keep books clean and encourage clients to separate their business and personal expenses.

What counts as a business expense?

Here’s a quick list of transactions I see frequently that aren’t always a business expense.

Meals:

Personal → your everyday Chipotle run, drive-thru Starbucks coffee, or quick trip to Buc-ee’s.

Business → meeting a current/potential client for lunch, a meal during a work-specific trip.

Clothing:

Personal → your day-to-day wardrobe, including any logo-branded items

Business → a uniform you wear specifically for and only for work

Vehicle:

Personal → the lease on your brand-new, limited-edition 4Runner

Business → a portion of the vehicle expense (specific situations), and mileage for work-related travel (not the drive to your office or studio space)

Travel:

Personal → your family trip to Myrtle Beach every July

Business → flying to Texas for a conference

Don’t forget about your bookkeeper! Monthly bookkeeping support is a fantastic business expense and a tax deduction. 😉

How do you check to make sure you’re swiping your card for the right thing?

Mixing personal and business expenses is not only messy and just bad business sense….it can also end up costing you an arm and a leg (via penalties & interest) with the IRS if returns are not accurate. And when your accounts aren’t separated, it gives you a skewed picture of how the business is doing which is likely to lead to bad financial decisions.

If you don’t have this set up already, open separate bank accounts, debit cards, and credit cards for your business and personal use. Business and personal expenses should stay in their respective accounts. (Do the best you can 😉.)

• Note that some expenses have a mixed use, so only a percentage is a write-off for the business, but should be paid from your personal accounts, and your CPA will calculate it. This can include vehicle payments, home office expenses, and sometimes flights, hotels, and other travel expenses.

Creating separate accounts is a major step towards clean books. (Yay! 🤩)

If you’re not sure where an expense stands, ask yourself if it’s an ordinary (AKA other owners of a similar business would buy the thing too) and necessary (AKA helpful to your business) transaction for the business.

If you answered yes, use your business account. (Like the expenses we listed earlier)

If you answered no, use your personal account. (Everyday household expenses, gas for your car, daily Starbucks coffee)

If you’re not sure, ask a bookkeeper! Or better yet, hire one to keep things clear, and you don’t have to second-guess it!

Whether you’re starting your business (congrats!) or you’ve been doing your own books for a while, it’s important to know how things work. These aren’t lessons you want to learn many years down the road.

Not every business expense is a write-off, and in some cases not every expense is necessary and ordinary for the business. But you don’t have to worry about that when you work with a bookkeeper. I’ll keep an eye on things and let you know if we need to make any adjustments.

If you’re starting to question if you’re mixing business and personal expenses, I can help you know exactly what belongs in the business and what doesn’t.

Click here to learn more about Numbers by Jen and book a discovery call today.

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Monthly Bookkeeping Services

Hi, I’m Jen – your numbers nerd and enthusiast when it comes to helping small business owners understand their numbers and give every dollar a purpose.

I help you manage your business books, so you can focus on what’s meaningful to you.

Here’s how we can stay in touch…

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Book a discovery call to see what it’s like to tag in a bookkeeper and what monthly bookkeeping support looks like for you.

If you have any questions, feel free to email hello@numbersbyjen.com or connect with me on Instagram here.