At Books & Benchmarks, as we categorize and reconcile our clients’ bank and credit card accounts each month, we are constantly learning what works best for our clients. One area that will consistently cause more work for you, your bookkeeper, and your CPA is tracking numerous personal expenses being run through the practice.
Of course, some expenses can be considered legitimate business expenses. These include things like health insurance, a cell phone, and, in some cases, a car. By categorizing these items as business expenses, you can lower your taxable income. However, some owners will either intentionally or accidentally put random personal expenses through the business as well.
The Cost of Expensing the Personal
Charging personal expenses through the business may seem like an innocent way to lower your tax bill, but it is not cost-free.
- Audit risk is the most obvious potential cost of putting extra personal expenses through your practice. The tax savings aren’t worth the risk given how small-ball most of these purchases are. Before you get to any penalties, the process of going through an audit is an expensive price in and of itself.
- Secondly, padding your P&L with non-business expenses will deflate your income and cash flow. While this does lower your taxable income, it can also decrease the value of your practice when you decide to sell. It’s true that normalizing adjustments will be made to a P&L’s net income when valuing a practice to sell. But don’t expect buyers to give full credit for income that doesn’t appear on your tax return.
- Running personal expenses through your practice distorts your business’s budgeting and cash management.
- Finally, having numerous personal charges in your financials can cost you time and money when financial professionals like your bookkeeper and CPA try to pull them out. You’ll have to spend time flagging which expenses are true business expenses and which are personal. And, if your CPA or bookkeeper charges by the hour, taking up more of their time can lead to higher fees.
Keep ‘Em Separated
It’s best to keep personal and business expenses separate. Make sure you have a separate credit card (and checking accounts, please!) for your household spending and your practice.
For most of our clients who mix personal and business expenses, the tax savings are immaterial compared to the effort required to differentiate non-business spending from practice spending. And even if you combine enough personal expenses with your business expenses to significantly reduce taxes, the risk of audit and penalties outweighs the tax savings.
To learn more about how the Books & Benchmarks team helps practice owners make great tactical decisions (like keeping personal and business expenses separate) and great strategic decisions (like how to manage costs or opportunistically spend for growth), contact us to schedule a discovery call.
