Small business owners running unincorporated businesses have to pay whatever income tax is due by April 30th and file their T1 income tax return by June 15th.
Does that mean that you’re spending time rooting through the glove box of your car looking for receipts or staring at one particular receipt trying to remember if that was the dinner with your in-laws or the one with your new clients?
It doesn’t have to be like this.
Separating your business and personal finances and keeping them that way will make tax time a less stressful, more organized experience – and help keep the tax man off your back.
How to Separate Your Business and Personal Finances
1. Keep separate chequing accounts. Having a separate business account (and using it) is essential. It not only creates a clear paper trail that makes it easier for you to keep your business accounts straight but also provides your business with credibility.
2. Get a business credit card. Like having a separate business bank account, having a business credit card will provide your business with credibility, and if you can get into the habit of using it religiously just for business purposes, you can really simplify your business accounting.
3. Keep them separate in your software, too. Use financial software such as Quicken or QuickBooks? Be sure that you have two separate systems set up; one for your personal finances and one for business.
4. Keep business receipts separate. Having a pile of receipts to sort through on top of a tax deadline is a nightmare – even if all you’re doing is trying to get them in some kind of order to take to an accountant. Avoid it by keeping your business receipts separate from your personal ones and organized, preferably by expense category if you want to make calculating income tax deductions absolutely painless.
5. Keep logs. A motor vehicle, your phone, your house – there are many things you use in the course of doing business where you will only be able to claim a portion of your costs as business expenses, so keeping logs of your actual business use is essential. Whether you do it the old-fashioned way writing entries in logbooks or by using phone apps, your logs will make figuring out the right percentages a snap at tax time and give you the evidence you need to be able to claim the expense.
6. Investigate incorporation. You may want to talk to an accountant about changing your business structure. Incorporation gives you a whole new level of separation between your personal and business finances as corporations are legal entities in their own right. Their built-in liability protection is a real plus to anyone operating a business that has a higher than average risk of being sued. Corporations also benefit from particular tax advantages that are not available to sole proprietorships and partnerships.
Less Stress and More Tax Success
Making sure that your personal and business expenses are separated will make tax time a much less stressful experience. And you have a much better chance of being able to take every possible deduction on your income tax if you have all your receipts and logs organized in advance – definitely a win-win situation.