That can include the use of credit cards. You might use your personal credit cards for business expenses and other services. While that arrangement can be convenient for an upstart business, it’s one you will want to change sooner rather than later.
Having a dedicated business credit card can provide several advantages both for your business and for you personally.
Keeping your business and personal finances separate
If you maintain a casual approach to the finances of your business you may never really know how profitable the venture is, or if it even turns a profit at all. You might even think that you’re losing money because there isn’t any money left over after paying personal expenses.
But personal expenses aren’t business expenses, and your business could be profitable even if you have no money left over at the end of the month.
Business profit has to be measured by business income less business expenses, which are expenses incurred in connection with producing that income. Personal expenses, like food, entertainment, housing and car expense, generally aren’t business expenses. By having a business credit card you’ll have a better idea what your actual business expenses are, and you can match that against your revenues to get at least a rough idea what your profit is.
Accurate numbers on profitability are important to determine whether or not you need to make quarterly or even monthly income tax deposits. If you mistakenly underestimate your profit during the year you may have a huge tax bill to pay when April 15 rolls around.
A dedicated source of business credit
When you’re in business, you will want to begin creating business accounts that will help you to build a business credit rating for future expansion. Rather than using personal cash or credit lines to fund your business, you should start to establish credit from your business.
This will allow you to fund and grow your business from the business itself.
If your business operates under a corporation you will need to create dedicated business accounts in order to maintain a clear separation between your business and your personal life. Business credit cards will allow your business to function as an entirely separate entity from you personally.
This will be important if your business ever faces legal or regulatory action. The entire purpose of incorporating your business will be to protect yourself from these actions. If you use personal accounts, including credit cards, interchangeably between business and personal transactions will weaken the separation that incorporating provides.
Any interest and fees payable with your business credit card will be tax-deductible as a business expense. The same can be true with personal credit cards, but you will have to do an allocation between personal and business use. Greater deductibility will come from having a dedicated business credit card.
Virtually all purchases made through your business credit card can be tax-deductible.
Easier tax preparation
If you use personal accounts in your business, you will have an accounting nightmare at the end of the year when you need to present your business information for income tax purposes. You’ll have to find the business transactions buried among the personal ones, and it can be a clerical nightmare.
Having a credit card dedicated entirely to your business, you can run your transactions through the card and by year end, you’ll have a written record of business activity and no need to separate out the personal ones. This will make tax preparation easier, but will also make it easier for you to know what the financial situation your business is at any time during the year.
Just by having a dedicated credit card, you may be able cut down on your tax preparation fees since less bookkeeping will be necessary. If you keep all your business transactions running through your business credit card, all you will need to do is provide a year end summary statement to your tax preparer and you will be done.
If you have your own business, do you have a dedicated business credit card, or do you use your personal cards?
photo by PT