How many times have you bought an item for your business and used cash, personal debit card, personal line-of-credit or personal credit card to make the purchase?
Have you ever bought something for business, then thrown out the receipt because it didn’t come from your business account?
Or perhaps you feel that if you buy for your business that you must first transfer funds from your personal account to your business account, then make the purchase from your business account to be an eligible business expense? Not so. That just creates a whole lot of steps that lead to frustration.
The Re-occurring Theme of Personal Funds Lost in Business Purchases
This seems to be a re-occurring theme with business owners I meet – using personal funds for their business, but not sure how to account for them. In many cases I’ve seen owners either forget about these expenses which in one case, amounted to about $18,000 in expenses. Holy crap! If the expense is overlooked, it could mean that without this expense deduction (corporately, in Alberta) you would pay about $2,500 in corporate tax on the income made. Wow, that’s a mistake you don’t want to make too often, right? In fact, this money from your personal funds is after-tax money, too – and I wasn’t even taking that into consideration.
Let’s de-bunk this process for good and discuss what should happen – in simple terms.
What Qualifies as a Business Expense?
Let’s first quantify what qualifies as a business expense. Any expense that is used to further your business purposes qualifies – regardless of how you paid for it. That means business account, personal debit account, personal credit card, personal line-of-credit and cash; they all qualify. Now how do you report it? Think of your business expenses as two categories:
1) expenses from your business account and
2) expenses from all other accounts (which I call “Out-of-Pocket”) or OOP.
Let’s discuss the second point in greater detail. If you worked as an employee and your company sent you on training in another city, they would usually ask you keep all your receipts and submit an expense claim for reimbursement on your return. The company would then write you a cheque. Now, take this same example and apply it to your business – you still deserve this reimbursement and should account for it in your bookkeeping. This needs to be paid back to you at some point in the future, and may have to wait until your business account has the funds to pay you back – but that doesn’t mean you forget about it!
So what do I suggest?
Goodbye shoebox – Hello envelopes! On each business receipt, write on it BUS (from Business account) or OOP (if from anywhere else). Next, for each month, label two envelopes. One might read “NOVEMBER BUS” and the other, “NOVEMBER OOP”. Now place the receipts you’ve labelled into the corresponding envelope.
Sound simple? It sure is. And here’s the biggest benefit of all…your bookkeeper will be smiling when you bring them your envelopes.
Mike April is the business manager for www.AprilTaxSolutions.com and his office can be reached at (403) 999-7455.