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Personal vs Business Expenses

Running a business is no walk in the park. Between managing projects and chasing clients, keeping track of finances can feel like another hurdle. One of the biggest roadblocks? Figuring out what counts as a business expense and what's, well, just for you (think lattes and that new yoga mat).

This is crucial because business expenses can be deducted from your profits, lowering your taxes and saving you money. Personal expenses, however, don't offer this tax advantage.

No worries, we've got you!

Let’s break down the difference between personal and business expenses. It'll help you streamline your finances and come tax season, you'll be thanking yourself (and maybe even us a little).

And this way, you can focus on what you do best – running your business!

So, what exactly qualifies as a business expense?

These are the lifeblood of your business. This includes office supplies, marketing campaigns that bring in the big bucks, and even travel for crucial meetings.

The IRS uses a two-pronged test: ordinary and necessary.

Ordinary means the expense is common and accepted in your industry. Think rent for your office space (if you don't own it) or employee salaries.

Necessary means the expense helps your business run smoothly. This could be marketing materials to attract clients, subscriptions to essential software, or even travel costs for crucial meetings. Remember, "necessary" doesn't mean absolutely essential – just helpful and appropriate for your business.

Some common examples:

• Employee wages: The salaries you pay your employees for their work are generally deductible.

• Retirement plans: These plans allow you and your employees to set aside money for retirement with tax benefits.

• Travel expenses: If your business trip lasts more than a day, your meals and lodging qualify as business expenses. This also includes local transportation between workplaces, like cabs or public transit.

• Professional memberships: Dues or subscriptions to relevant business organizations can be deducted.

• Work-related expenses: Union dues, required uniforms, work-related educational courses, necessary tools and supplies – these all fall under business expenses.

• Home office: If you have a dedicated home office used exclusively for work, you can deduct a portion of your home expenses.

What about personal expenses? These generally don't fly for tax deductions:

These keep your personal world turning. Think rent, groceries, and that gym membership you (hopefully) use.

Some common examples:

• Commuting expenses: The daily grind from home to work is on you.

• Fines and penalties: That parking ticket? Not a business expense.

• Family travel on business trips: Bringing your family along for the ride? Not a business expense.

• Business attire (unless required): That stylish suit (unless it's a mandatory uniform) comes out of your pocket.

Pro Tip: Keeping receipts and invoices helps prove these expenses were for your business (think of it like collecting gold stars for your tax return!).

Ever used something for both work and play? No worries! We'll show you how to figure out which part counts as a business deduction.

Keeping it Simple:

• Separate Bank Accounts: Keeps things organized and simplifies record-keeping.

• Business Credit Card: Makes it easy to see what you're spending on the business.

• Good Records: Receipts, invoices, mileage logs – these are essential for a smooth tax season.

By mastering this distinction between personal and business expenses, you'll be a financial pro in no time. Now you can focus on what truly matters: making your business a success. If you ever have questions, feel free to reach out – we're always happy to help!

Unsure if something qualifies? Don't hesitate to ask your tax advisor or accountant. They can help you navigate the world of business expenses and ensure you're maximizing your deductions.

P.S. We can help you proactively plan to pay less in taxes and file your personal and business tax returns for you with Carry VIP. Learn more here!

Happy spending (the smart kind!)

What’s Happening at Carry?

Here’s what you can expect in the coming weeks

See the full list of events here. ⏰

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If you want more resources on building wealth as a solopreneur/entrepreneur, check these out:

• The Solo 401k handbook 

• The Roth IRA handbook 

• The Self-Directed IRA handbook 

• The Guide to Paying Less in Taxes

• What is a Solo 401k?

• How to Open a Solo 401k