How to handle self employed business expenses (non reimbursable)?

Hi everyone,

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.

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  • 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. :)

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  • 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? 

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  • 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.

    Like 3
      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 1 yr ago
      • Reported - view

      nolesrule I just noticed my typo (pre-coffee). "she" not "he". Can't edit the post.

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  • 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.

    Like 1
  • 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.

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  • Beanorama said:
    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.

    Like 1
  • 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.

    Like 2
      • Beanorama
      • beanorama
      • 1 yr ago
      • Reported - view

      Digital Diva Thanks for getting back to the main point of the OP. Separate accounts and separate budgets for personal and business. Frankly, once setup, even for "small" businesses it's easier. (The question of whether to have another, separate credit card for business spending is another and multi-faceted issue; if you don't, you can still do expense reimbursements to yourself just as would if you had employees incurring expenses.) 

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  • Beanorama said:
    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.

    Like 1
  • 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.

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      • nomade0
      • Silver_Door.5
      • 1 yr ago
      • Reported - view

      Tan Yearling Your method works, the only drawback is that it artificially inflates your income and spending when you run reports. I like to see my report accurately reflect my personal income and expenses, so I like to do it differently.

      I have a category for Business Reimbursable Expenses, and everything I spend for that is categorized there. When I get the money back, I don't categorize it as To Be Budgeted, instead I categorize it to the same Business Reimbursable Expenses category so that it zeros out. 

      The problem with my method is that since I don't budget for my reimbursable expenses (I use a credit card), the category goes negative -- that in itself is not an issue. But when the month rolls over, my category "Available" negative balance goes back to zero (a design choice by YNAB). So if I get reimbursed in Month 1 for expenses incurred in Month 0, then my Business Reimbursable Expenses category shows a positive balance. So I need to remember, when the month rolls over, to copy the negative balance from Month 0 to Month 1. It's the best way I've found, even though it's far from ideal. 

      In short, YNAB doesn't handle reimbursable expenses very well, it's the most "problematic" area of the software for me. 

      Hope that makes sense!

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      • Beanorama
      • beanorama
      • 1 yr ago
      • 1
      • Reported - view

      Tan Yearling though I agree with the other posters suggesting that you'll want to have the books and budget separate at some point (and it will be easier to do it sooner), I would like to answer your question. The main reason for keeping business expense records for us is to do our (US) federal income taxes. I have very few "business-management" needs for booking expenses other than reconciling my accounts. Budgeting is simple. Far and away the most important is tax. So I've gotten away from what everyone else says my expense categories "should" be. I now have optimized them to match the categories in Schedule C to my tax return. For me, the most time-consuming part of doing my taxes is the "Other deductions" statement on the second page. To keep it simple, as much as possible goes into the pre-defined deduction categories on the front of the schedule. (Following the IRS instructions, of course.)

      And yes, I would keep business expense categories separate from personal categories. If you don't, as mentioned before, you're making things a whole lot more difficult for yourself if you have to defend an audit. *In theory,* if you keep original source documentation of the expenses, that could be enough, and how you book or budget them is irrelevant. But I can't recommend going into an audit without a correct and detailed P&L and instead, just a shoebox of receipts.

      Like 1
      • KD603NH
      • KD603NH
      • 1 yr ago
      • Reported - view

      Tan Yearling I will again implore you to separate your budgets (and just to clarify you don't need an additional budget subscription, you can add multiple budgets under your main account for free)

      But, without doing that - have a "Wife's Business" master category. 

      Underneath that, add in an "Income" subcategory, followed by the expense categories. When her commission checks come in, categorize them as "Wife's Business: Income" and then WAM from there into the expense categories. She should also be budgeting ahead and pre-funding those expense categories rather than letting them run negative and then filling them in with income after the fact.

      Any leftover funds can be WAM'd to other areas of the budget or TBB.

      And, just as an aside, here is a recording of a demo budget I have for people who run schedule c on their taxes.

      https://www.loom.com/share/9715ae3e035c42c5bdee0680d4a9142a

      Like
  • 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.

    Like 2
      • mamster
      • mamster
      • 1 yr ago
      • 3
      • Reported - view

      nolesrule Yeah, the thing I always say about this is: It's definitely going to be somewhat of a pain separating out your business expenses and income, but nobody ever said, "Wow, I wish I'd never taken the time to separate out my business finances."

      Like 3
  • 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.

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