How to handle self employed business expenses (non reimbursable)?
My wife currently has a small business & I am struggling on how to manage her business expenses through our personal budget, which is not very much to begin with.
I know that it is recommended to have a separate checking and credit card setup to run her business, however we like to maximize our credit card rewards so we use whatever credit card earns the most rewards.
What is the best way to handle these types of expenses? Should I setup a primary business category group w/ miscellaneous sub categories and then categorize accordingly to the expense?
Would setting up an off budget tracking account be a better way to go similar to how an off budget reimbursable account would work?
Appreciate your time and input.
Hi Tan Yearling !
You're right! For a number of reasons, we suggest a separate business budget - but that's a complicated approach if there's personal and business spending on the same card.
Instead, I think having that business category group in your personal budget would do the trick if you want to keep the expenses in your personal accounts. This way, you can still budget and monitor those expenses. :)
Tan Yearling If these expenses are not reimbursable, do you want to track them in YNAB for tax deduction purposes?
If so, then you're going to need the receipts for all these expenses in case of an IRS audit. Unfortunately YNAB doesn't provide that feature, so I would not recommend it for that purpose. I personally use Expensify.com to track my tax deductible business expenses. I know it's a tool designed for reimbursable expenses, but because it handles storing and matching receipts pretty well, I find it really useful for tax deductible expenses. I compile a report of all my business expenses at the end of the tax year with all the receipts, and I export it in PDF with all receipts included in high resolution. Very convenient.
If not, and you need to track business expenses just for the purpose of running the business, calculating P&L etc, then you should probably use a dedicated tool and a dedicated bank account, no?
Maximizing rewards is a silly reason for not keeping things separate. How much extra rewards is that business spending actually gaining you? Be smart and do the right thing.
Besides, he can always apply for her own card that allows points transfers to one of your current rewards programs. That's what I do.
There can be plenty of good reasons why not to have a separate business credit card. Using business expenses to rack up points can be a really good one; it equates to several thousand dollars in additional tax-free compensation to us. In our circumstances, another good reason is it keeps the principals from having to carry two cards and be very disciplined about which one to use. Having a separate card is a source of error, and if the wrong card is used even just once, the business needs an expense reimbursement process anyway. A separate business card is also not a solution because we have subcontractors incurring expenses that we bill-through to our company's clients.
Separate cards is a bugaboo for accountants, because it makes their work easier, and lawyers (speaking as one) because it's easier to control your client's risk of having their company's veil of liability pierced. Both professions are paid to be risk-averse, and it's easier for them to be when it's in their interest to be. But as a business owner (who's also litigated corporate veil-piercing), I perceive no risk to our business by having a system for reimbursing contractors, staff or the owners themselves for business expenses they incur personally, certainly not any more risk than when we worked for multi-million dollar companies as employees and were reimbursed for the expenses we incurred for them.
So I've been spending too much time with a new business looking for tools might help us manage the reimbursement of personally-incurred business expenses. I've not found it in anything short of a full-on massive business accounting systems we don't need. Instead, I'm finding myself implementing procedural work-arounds on YNAB and Freshbooks.
I'll take a look at Expensify. com -- sounds promising! Thanks for that tip.
You are correct that the main reason for separating accounts is insurance against a what if. But, as long as you are reimbursing yourself out of business funds (or creating a payable from the business to you / making sure personally paid expenses are recorded as an owner contribution or loan to the business) and passing along the expense to the business religiously it shouldn't be a problem.
In YNAB, one of the main reasons for having a separate budget is for your reporting to be accurate from a income / expense and profit / loss standpoint. It can be worked around through creating "memo" categories for reporting, dumping things into a spreadsheet and playing around, etc.
You can still totally track all your business expenses in their own master and sub-categories in YNAB, which is the easiest way to do it if not the most "appropriate". I just take pictures of any appropriate receipts on my phone, or scan them, or pdf electronic files and store them categorized in a Business Expense folder in Dropbox for easy recall at tax time.
There can be plenty of good reasons why not to have a separate business credit card. Using business expenses to rack up points can be a really good one; it equates to several thousand dollars in additional tax-free compensation to us. In our circumstances
As noted above by nolesrule there are options for transferring points. If one has the Chase Sapphire (Preferred or Reserve) as the personal card and the Chase Ink Business Cash Card (5% on telecom and office store purchases) the points can be pooled with a manual transfer on a periodic basis so it's not an either/or.
It is always best to not mingle personal and business expenses. If it is a truly a legitimate business, I would strongly suggest that you run it as one. Even if income and expenses are low now, she should set herself up for growth. Get things right and in order now while it is manageable and create great habits for success in the future.
Separate bank account. Separate YNAB budget.
There can be plenty of good reasons why not to have a separate business credit card. Using business expenses to rack up points can be a really good one; it equates to several thousand dollars in additional tax-free compensation to us. In our circumstances, another good reason is it keeps the principals from having to carry two cards and be very disciplined about which one to use.
If you aren't using multiple cards already, you're not doing credit card rewards right in the first place and shouldn't be using it as an excuse. If you are doing it right, what's one more card?
I have one checking, one savings and one credit card per business entity. It's just not that hard.
If it's a sole proprietorship, then you don't even have to get a real business credit card. Just sign up for a personal card you use for business only.
Appreciate everyone's input. Since my wife doesn't have a ton of expenses at this time I want to keep things simple for me and not have 2 separate budgets for personal and business.
As far as tracking business receipts I use Evernote to keep track of the business receipts using tags that match up with the items found on the schedule C to make it easier when its time to file taxes.
For those of you that have not utilized a separate budget for business are you using the method of having a general business category and then subcategories such as office supplies/ expenses etc or are you assigning the charges directly to your main personal budget categories with specific memo references marked for business?
What I have been doing so far when my wife receives her monthly commission checks is categorize the deposit to be budgeted so it is counted as income and then I assign the income to the specific sub business categories that she has spent in to zero out the categories.
Tan Yearling said:
Since my wife doesn't have a ton of expenses at this time I want to keep things simple for me and not have 2 separate budgets for personal and business.
It's better to employ best practices from the beginning. It becomes more difficult to switch over to doing it the right way the longer you've been doing it the wrong way.
I can confidently recommend a clean separation of financial affairs if you expect the business activity to continue, and that is regardless of the current size of the business. A separate bank account, and a separate credit card to keep the income and expenses grouped on their own. A detailed car care and mileage log that corresponds to a planner showing what business activity occurred on what date is a must if a person uses their personal vehicle for business and expects to be able to claim a portion of their expenses as a tax deduction. At first blush it seems like a lot of work for small reward, but the system and process and discipline being established as a habit as the business grows will serve you well.
I did a 6-year stint in a business incubator centre helping start-ups and dreamers. At the time I was on loan from my job at the federal dept of Industry and I generally handled a mishmash of adhoc commercial information requests -- how do I export gophers to Japan? who do I market my hand-crafted snow shoes to? -- and we always had at least one colleague on loan from the federal tax department. Every single tax department rep I worked with would shake their head at the absolute mess people made of keeping personal and business combined in the early stages of start-up. In many cases it made the deductible expenses ineligible simply because they were not documented or easily separated. This was Canadian tax code, so YMMV.