Personal vs. Business Expenses: What's Deductible?

Discover the clear line between business and personal expenses and unlock the potential for tax deductions and financial organization.

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When you’re running a business, it’s important to understand the difference between business expenses and personal expenses. Keeping these expenses separate is crucial for proper accounting, tax deductions, and maintaining financial clarity. In this article, we’ll explain the concept of business expenses versus personal expenses and provide useful tips for keeping them organized.

Separating Business and Personal Expenses

To ensure a clear distinction between your business and personal finances, it’s essential to have separate bank accounts and credit cards. While it may seem convenient to use your personal accounts for business transactions, commingling funds can create complications and raise red flags with tax authorities. By maintaining separate accounts, you’ll have a better understanding of what expenses are deductible for your business, making tax time much easier and reducing the risk of mistakes.

What are business expenses?

According to the IRS, business expenses are considered “ordinary and necessary” expenses incurred in the course of running your business. These expenses are typically tax-deductible for LLCs and other business structures, meaning you can write them off when calculating your business taxes. 

Common examples of business expenses include office rent, employee salaries, utilities, supplies, advertising costs, professional service fees, and travel expenses directly related to business activities. By keeping track of these expenses, you can reduce your taxable income and potentially save money on taxes.

Home, Auto, and Shared Expenses

If you use your home or vehicle for both personal and business purposes, it’s important to allocate the appropriate portion for each use. The IRS allows you to deduct the portion that is used for business. For example, if you use 20% of your home exclusively as a dedicated office space, you can deduct 20% of your rent or mortgage interest, utilities, and maintenance costs.

Similarly, if you use your vehicle for business-related travel, you can deduct the portion of expenses that relate to business mileage. Keeping accurate records and documenting the business use of these shared expenses is crucial for maximizing your deductions.

Hobby vs. Business

Sometimes, people engage in activities that they may consider businesses, but the IRS classifies them as hobbies. It’s important to understand the criteria the IRS uses to determine whether an activity qualifies as a business or a hobby. The IRS looks at factors such as the intention to make a profit, the level of effort and activity, and the consistency of income generation.

If the IRS determines that your activity is a hobby, you won’t be able to deduct related expenses as business expenses. Understanding the distinction can help you avoid potential pitfalls and ensure that you follow the proper guidelines.
Curious about potential tax write-offs you can take? Check out our tax write-off guide.

We can help!

Managing your business finances efficiently is crucial for success (and saving money on taxes). That’s why ZenBusiness offers the tools and services you need to start and manage a business that maximizes its tax advantages. Our Money app provides a user-friendly platform to manage your business finances, track expenses, and generate reports. ZenBusiness Banking gives even the smallest start-up the banking tools you need to establish a business bank account.

Even if you need help starting your first LLC and maintaining it long-term, we’ve got your back. Let ZenBusiness be your partner in achieving your entrepreneurial goals, so you can focus on what you do best — growing your business.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

FAQs About Business vs. Personal Expenses

  • Personal expenses are generally not tax deductible for business purposes. The IRS requires a clear separation between personal and business expenses. However, there are certain exceptions, such as using a portion of your home or vehicle for business purposes, where you can deduct the corresponding portion of those expenses. It’s important to consult with a tax professional to understand the specific rules and regulations regarding deductible expenses.

  • In general, personal expenses are not tax-deductible, especially for your business. There are certain personal expenses that qualify for certain tax credits, but you can only use those for personal taxes, not business taxes. If you’re hoping to maximize your tax refund for your business and personal returns, consult with a licensed tax professional for help. 

  • The amount you can deduct for personal expenses depends on whether those expenses have a business purpose and meet the IRS criteria. For shared expenses, such as home or vehicle use, you can deduct the portion that is used exclusively for business purposes. The specific calculations and limitations can vary, so it’s crucial to maintain accurate records and consult with a tax professional to determine the appropriate deduction for your personal expenses.

  • Business expenses should generally be deducted on your business tax return, not your personal taxes. By maintaining separate business and personal accounts, you can accurately track and report your business expenses. However, there may be exceptions for certain types of business structures, such as sole proprietorships, where business income and expenses are reported on the owner’s personal tax return. It’s recommended to consult with a tax professional to ensure you understand the specific requirements and guidelines for deducting business expenses on your tax return.

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