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Personal vs. Business Expenses

Sole proprietors can enjoy the flexibility of being able to work when they want, where they want and how they want. However, these perks often times can make it harder to separate your business and personal activities. Working from home, using your personal vehicle for business and entertaining clients are just a few of the many areas where a sole proprietor may have a higher propensity for error. While separating your business and personal activities may never be completely black and white, we have some helpful tips to help you navigate the gray.

ENTREPRENEUR

Saleem, a personal trainer and Yoga instructor from Park City, Utah recently purchased a $250 heart rate monitor to use in his business. Since Saleem works in the fitness industry this expense could be considered ordinary. Since the heart rate monitor will help him train his clients (assist him with his business) this expense could also be considered necessary. Note however that if Saleem were an accountant, the same $250 heart rate monitor would likely not be considered ordinary or necessary and would not be a deductible business expense.

AIRBNB HOST / LANDLORD

Adrian is an Airbnb host with two homes, one of which she uses exclusively for Airbnb, the other is her personal residence. She recently purchased 8 cans of paint for $200 to be used to touch up her rental property. When she finished painting her rental she had two cans of paint left, which she brought home and used on her personal residence. Even though she originally purchased all of the paint for her rental, when Adrian prepares her Schedule E she would only deduct $150 (6/8 x $200) since she ended up using some of it for personal purposes.

REAL ESTATE AGENT

Debby is a real estate agent who just got a new contract to manage a large commercial property. She knows the steady management fee will make her a lot of money so she decided to take her family out to dinner to celebrate. Even though she wouldn't have gone out if she hadn't closed the deal, since this dinner clearly benefits her family more than it does her business and it doesn't meet the IRS definition of a business meal she would not be able to claim the expense on her Schedule C.

AUTHOR / SPEAKER

Wonyoung is a freelance writer who writes content for sports blogs. To completely avoid the possibility of confusing his business expenses with his personal expenses, he opened up a separate bank account to run all of his business transactions through, no matter how big or small. Not only is Won doing a good job drawing the line between business and personal, but since everything is separate, he can easily see how well his business is doing and he saves hours each year when he sits down to prepare his tax return.

UBER DRIVER / RIDESHARE

Schrader is a stay at home dad who drives part time for Uber. When Schrader leaves his house to start driving, he usually deducts the cost of the miles he covers while searching / waiting for a fare, which can be a legitimate business expense. Three times per week however he drops his kids off at daycare before turning his Uber app on. While he may be tempted to deduct the miles in between his home and the day care center, he knows this would be crossing the line into personal territory so he does the right thing and waits until he actually starts working to deduct his miles.

WHAT TO KNOW ABOUT PERSONAL VS. BUSINESS EXPENSES

Business expenses are defined as costs that are ordinary and necessary for your trade or business. Ordinary means the expense must be a common one for your industry. Necessary means the expense must be helpful to your business. If you are ever in doubt determining if something is business the first place you should start is by asking yourself if it is ordinary and necessary.
The IRS does not have a formal definition of nonbusiness expenses, however, nonbusiness expenses will generally tend to not be ordinary and necessary, provide you with a significant personal benefit, provide a related party or family member with a significant benefit, or not meet specific IRS requirements for deduction.
One of the best ways you can help draw the line between your personal and business expenses is to open up a business bank account. Simply having a separate credit or debit card that you only use for business can greatly reduce the likelihood of mixing up business and personal. Additionally, be sure you keep good records. Not only can good records help you substantiate your business expenses in the event of an examination, but the act of keeping good records by itself creates an additional filter that may help keep any borderline transactions off your Schedule C.
If you use an asset for both business and personal, keep track of what percent of your use is related to your business activities. Picking a meaningful metric to track business use, such as mileage, square feet, or time can help you turn your estimate into a substantiated amount that can be used to help you divide costs accurately.
More often than not you will know right away what side of the line an expense falls on. If you don't, ask your tax advisor or visit the IRS website to see if you can gain some additional clarity. If all else fails use your best judgement and err on the conservative side.

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IRS PUBLICATION

Deducting Business Expenses

IRS PUBLICATION

Business Expenses

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