Balancing those books is a painful enough experience as it is, but when so many small businesses also incorporate personal expenses into the day-to-day costs, too, it becomes even more of a nightmare. Then the questions stop being solely about correctly calculating income and expenses and instead about what items should be included and how exactly do you deal with a charge of which only a partial amount should be directed at the company? It’s a minefield, frankly, but at least there are solutions to help make the process that little bit easier for SMBs and sole proprietors to successfully manage their expenses.
What Is a Deductible Personal Expense?
According to the IRS, a personal expense falls into the deductible category if it is ordinary or necessary. Ordinary expenses means things business owners in a specific industry might typically purchase – like software, office supplies, advertising – while necessary expenses are costs required to run a business. And with the exception of government-imposed fines and penalties, business clothing, illegal activities, hobbies, federal income, gifts, estate taxes, and business gifts exceeding the value of $25, every ordinary or necessary personal expense is fully deductible. However, keep in mind that items and equipment intended to last for more than one year should not be included as expenses, but classed as assets instead.
Personal Expense Management in Online Accounting Solutions
All accounting solutions have a separate tab where you can manually enter expense claims, even attaching the relevant receipt to the input data. Additionally, the apps of these solutions are capable of immediately attaching receipts to the relevant expense claim by snapping a picture of it with your phone’s camera. Each expense can be categorized in accordance with the default categories of the accounting software, but your own categories can be created too. And regardless of which source you enter the expense, what its category is and whether it was paid for with company funds or came from your own pocket, it will automatically appear on the accounting software’s dashboard as a claim to be approved by the account’s admin. Once approved and the bank transaction has been reconciled after the debt is paid by the business, the expense is duly recorded in the accounting software and it is also displayed in the automatically generated business reports, too.
The only problem with this simplified process is that it cannot automatically handle cases where only part of the outgoing payment has to be reimbursed to the employee that made the expense. However, that doesn’t mean partial expense claims cannot be recorded: Xero, for instance, recommends splitting transactions then simply deducing the amount that was partially paid by a colleague. If partial payments occur regularly, simply note that on the expense claim and then these transactions will all automatically appear in bank reconciliations so they can be split in the same fashion described above.
Personal Expense Management in Third Party Apps
Although certain online accounting programs are capable of handling split business and personal expenses, this feature is not always available, especially in the case of simpler accounting solutions. Thankfully the built-in expense manager can be always complemented or fully replaced by integrating a third party solution to the accounting software. Such programs include Receipt Bank that has the Smart Split feature for this very purpose, but other solutions like Abacus, Bill.com and other expense management software can deal with split expenses.