Business expenses are the costs incurred during the business’s day-to-day operation such as space rent, personnel wages, and equipment expenditures.
Personal expenses are the costs associated with meeting one’s requirements such as groceries, mortgage payments, or personal auto upkeep.
In tax accounting, accurately recognizing and classifying expenses is crucial to maintaining regulatory compliance and optimizing deductions when relevant. Every small business owner, self – employed folks or gig workers should know the difference between business expenses and personal expenses.
The income statement should be calculated after knowing which expense belongs to the business. Recording the business expenses leads to lower taxable income and reduces the amount of tax you own.
Contents
What is Business Expense?
Business expenses refers to those expenses that are incurred as a part of the business’s operations.
As per the Section 162 of Internal Revenue Code, it allows businesses to record any expenses that are ordinary and necessary.
Ordinary means the expense must be common in your industry whereas Necessary means the expense must benefit your business.
Business expenses are tax- deductible such as certain legal fees, equipment rentals, education and training expenses for employees, advertising and marketing.
Examples of Business Expenses
- Business mileage
- Advertising and marketing
- Educational expenses for employees
- Equipment maintenance and repair
- Insurance
- Bank fees and interest
- Commissions
- Rent or office lease
What is Personal Expense?
Personal expenses refers to those expenses that are not related to the business and are entirely for personal use.
Personal expenses are not tax-deductible such as car payments, home office expenses or meals and entertainment.
Examples of Personal Expenses
- Fines or penalties
- Business attire
- Travel expense for family on a business trip
- Accreditation Fees (eg. licensing exam)
- Commuting expenses ( eg: parking ticket)
Separating business expense and personal expense
It is very important to keep a separate account for your business expenses and personal expenses. The recording of tax becomes easy if the expenses are already recorded separately.
Every business owner should use a business bank account and credit card for all their business expenses. This helps in maintaining clarity while recording the transactions.
If you are confused about which expense should be recorded in:
1. Healthcare
Employers who provide group health insurance to their staff members may deduct the cost of qualified medical services from their taxes. Small businesses need to insure more people in order to be eligible for group coverage.
The Health Insurance Deduction, which allows self-employed individuals to write off the expense of qualified health plans for themselves and their families, is supported by the IRS.
2. Vehicle – expenses
Travel expenses are handled differently than vehicle travel. When you use your car for work, you can write off a percentage of the cost. This covers tires, oil and gas changes, depreciation or lease payments, maintenance, tune-ups, insurance, and registration costs.
The mileage incurred for work and personal purposes must be separately computed, and journeys from your residence to your place of business cannot be claimed as business-related mileage. When allocating company expenses based on mileage, there are two methods. You have two options:
- Break down the cost of each car according to the business miles driven
- Make things easier by calculating your annual vehicle business expense deductions using the normal mileage rate.
3. Home business costs
When someone uses a portion of their house as an office, they incur home business expenses. When you utilize the business portion of your house completely and frequently for your trade, you can deduct your home office.You can also use a separate building that isn’t a part of your house as your home office.
A portion of your mortgage interest, your utilities, insurance, maintenance, and depreciation may be deductible as business expenses.
4. Hobbies
The IRS has established its hobby loss rules in IRC Section 183, which are designed to stop the taxpayers from claiming business losses for activities that are primarily recreational and nonprofit.
If the IRS considers your hobby as primary recreational activity, then the income it generates is taxable. However, if the IRS considers your hobby a business, the net loss would be deductible against other income, similar to any other net business loss.
Business Expense vs Personal Expense
| Business Expense | Personal Expense |
| It refers to expenses that are incurred during company operation. | It refers to the expenses that are incurred outside the company’s day to day activities. |
| They are tax deductible. | They Are not tax deductible. |
| Examples: Rent, Insurance, etc. | Examples: Books, tuition fees, etc |
Outsource Your Bookkeeping, Get Expert Assistance
Working together with expert services like eBetterBooks gives you access to specific tax and bookkeeping knowledge and experience. Their all-inclusive services guarantee timely tax filings, correct financial records, and prudent financial planning. This improves your company’s financial health in addition to saving time and lowering the stress involved in handling finances.
Conclusion
The possibility of confusing work and personal cards can be significantly decreased by just keeping a second credit or debit card that you use only for business. Creating a company bank account is one of the best methods you can assist in defining the boundaries between your personal and business costs.
