What should you keep separate? Business and personal expenses, of course! When you operate a business, including a sole-proprietorship, an LLC, corporation, or even as a realtor, your business activities need to be kept separate from your personal expenses. This is especially important in the case of an audit by the IRS. Here are some best practices and areas where it matters most:
Have Two Separate Checking Accounts: One for your business and one for your personal expenses. When you have to pay for a personal expense, make sure to use your personal checking account. If you pay personal expenses through your business accounts, you will need to separately record these as draws or distributions, otherwise it may look like you are trying to deduct personal expenses as business expenses. The same applies to business expenses. Even though business expenses that are paid personally may still be deductible, chances are that you will not keep track of these expenses and forget to include them on your tax return, thus you end up overpaying taxes.
Business Vehicles, Property, and Equipment: Make sure that you purchase any business property in the name of the business. If the assets are on the books of the business, they need to be owned by the business.
If a Vehicle is in Your Name Personally: Corporate owner-employees may be able to reimburse themselves for vehicle expenses.
The bottom line is to keep your records clean, separate, and simple.