In last month’s newsletter part 1 in this series of articles discussed the most important reasons why business and private expenses should be kept separate. Just to recap, the two main reasons for separating business and private expenses are the following:
If the business owner needs to take decisions regarding the business, he needs accurate figures. If the business expenses include private expenses, business expenses will be too high and profit will be too low. It will make the business look less profitable than it actually is. The reverse i.e. where the owner pays business expenses out of her own pocket without recovering the cost from the business, business expenses will be too low and the profit will be too high. In this case the business will appear to be more profitable than it really is.
If SARS conducts an audit and private expenses were included as business expenses, the profit will be too low. SARS will not allow the private expenses to be deducted for tax purposes. The private expenses will be added back to the taxable income for the calculation of tax payable. This will cause the taxable income to increase, thus increasing tax due. SARS will impose fines and penalties if too little tax was paid because taxable income was understated.
It sounds like a good idea to keep business and private expenses separate but how do you actually do that? Here are some ideas to get you started:
Use separate filing systems: Keep receipts for business expenses separate from receipts for private expenses. File the receipts in two different places right from the start.
Keep the books separate: Use two separate sets of books for keeping record of business and private finances.
Open a separate business bank account: Open a separate business bank account and make sure to use it only to pay for business expenses and make only business deposits into it.
Apply for a separate business credit card: Only pay for business expenses with the business credit card. Pay all private expenses with your personal credit card. If you cannot open a business credit card account, open an additional credit card in your own name and use it only to pay for business expenses.
All transactions must be at arm’s length: Transactions between you and your business must clearly separate the business entity from you as a personal entity. Make sure there is sufficient documentation to support your intention that you and your business separate entities for legal and financial purposes.
Have the right documentation when putting assets or cash into the business: Make sure there is sufficient paperwork to prove that the assets or money you give to the business is to be considered a loan from you to the business or as an investment made by you in the business.
Have the right documentation when taking money or assets out of the business: If you work in the business pay yourself a market-related salary for the work you do. The salary should be paid from the business bank account into your personal bank account. If you take assets e.g. stock from the business, make sure to record it in the business’ books.
If the business pays rent to you, make sure you have the right documentation: Draw up a rental agreement between you and the business if you run the business from property that is registered in your personal name.
From the above it is clear that the correct paperwork must be in place for transactions between your business and yourself at the time of the transaction. In addition, all aspects of transactions between you and your business should be reasonable and at arm’s length. Keeping business and personal receipts, and ultimately business and personal finances separate right from the start can save you a lot of time, headache and money later on.
If you would like more information on how to separate business and personal expenses, please contact your tax practitioner and/or financial advisor.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
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