Your personal expenses don’t become business expenses just because it’s paid for out of your business account. I know this seems obvious but I see it all the time so this is your friendly reminder about this subject. It’s currently on my mind this morning because I’m correcting a small partnership’s accounting to remove the owner’s personal expenses.
Don’t get me wrong, I know small business owners have a lot going on and keeping track of their expenses is always challenging. There are a lot of reasons this happens and most of the time I know it’s done accidentally. However, if it’s a personal expense, your business can’t take a deduction for it on its tax return so it needs to be recorded properly in your accounting software.
Some of the common reasons I see these personal expenses in the business account include:
- the owner accidentally used the business credit card when making a personal purchase
- the owner didn’t have their personal credit card or checkbook available at the time of payment
- the owner didn’t have the cash in her personal account when a payment needed to be made
- the owner purchased both business items and personal items at the same time and made one payment for all the items
Let’s face it, all of these reasons are justifiable, but you need to correct it as soon as possible. If you don’t, it’s easy to forget about it and it gets lost in the details. I always advice my clients to avoid this at all costs but it can and does happen, so when it does, tell your accountant about it and get help finding out the best way to correct the payment. The worst thing you can do is pretend it didn’t happen and hope your accountant doesn’t find it.
There are many ways to correct it depending on the circumstance that created this payment from the wrong account. Your bookkeeper, accountant, tax professional, or who ever it is that helps you should be able to give you instructions to fix it. And hopefully once it’s fixed, you’ll remember not to do it again in the future.