How do I properly mix a personal credit card with a business bank account?
January 21, 2010 1:14 PM
How do I log the use of a personal credit card for my business so as not to confuse the heck out of my accountant, come tax time? (Canada)
Yes, I know, mixing business and pleasure - the ultimate tax sin! But I really didn't have much of an option here. I started a new business and opened a new business bank account. They don't extend credit unless you can show income, so I had to use my already-existing personal credit card for server rental, etc.
Subscription payments come off my credit card, and I pay that credit card from my business bank account. Then, in my accounting software, I log that payment as from my bank account to the vendor in question, basically skipping the credit card step entirely.
Originally when I started doing this, I figured that it was easier, conceptually, to do it in one step, but I Am Not An Accountant, so I'm rethinking my original thought.
Is this cool? Will my accountant be able to make sense of this, or should I go back in and re-do every transaction to include the credit card step?
Yes, I know, mixing business and pleasure - the ultimate tax sin! But I really didn't have much of an option here. I started a new business and opened a new business bank account. They don't extend credit unless you can show income, so I had to use my already-existing personal credit card for server rental, etc.
Subscription payments come off my credit card, and I pay that credit card from my business bank account. Then, in my accounting software, I log that payment as from my bank account to the vendor in question, basically skipping the credit card step entirely.
Originally when I started doing this, I figured that it was easier, conceptually, to do it in one step, but I Am Not An Accountant, so I'm rethinking my original thought.
Is this cool? Will my accountant be able to make sense of this, or should I go back in and re-do every transaction to include the credit card step?
1. Do not confuse how you categorize an expenditure with who you pay.
2. If you can get a second personal credit card, use that one exclusively for work-related expenses until your enterprise qualifies for a business account. Pay it out of your business bank account.
posted by carmicha at 1:22 PM on January 21, 2010
2. If you can get a second personal credit card, use that one exclusively for work-related expenses until your enterprise qualifies for a business account. Pay it out of your business bank account.
posted by carmicha at 1:22 PM on January 21, 2010
This happened to me earlier this year. For a couple months I designated one of my rarely-used credit cards "for business expenses only" just to keep everything straight. Then as soon as I had some funds in my business bank account, I got bank card for it and started only using that for transactions. Then I paid off my personal credit card bill in one fell swoop (for the business-use items only) using a check from my business bank account.
Then I gave my accountant the personal credit card statement with all the business expenses highlighted. He didn't seem too confused. I don't know how other people do it (and I don't use financial software) but this is how it worked for me. Now I only ever use my business bank card for purchases, because it makes thing a LOT easier to track.
All this is assuming you will shortly have funds in your business bank account from which to draw.
posted by np312 at 1:33 PM on January 21, 2010
Then I gave my accountant the personal credit card statement with all the business expenses highlighted. He didn't seem too confused. I don't know how other people do it (and I don't use financial software) but this is how it worked for me. Now I only ever use my business bank card for purchases, because it makes thing a LOT easier to track.
All this is assuming you will shortly have funds in your business bank account from which to draw.
posted by np312 at 1:33 PM on January 21, 2010
I have a debit card for my bank account, and that's all well and good, but one needs a credit card to pay for online services.
In Canada, we have a very strict difference between debit cards and credit cards - debit cards can be processed through the Interac system and draw directly from your bank account, while credit cards are processed through the credit card system and draw from an extended source of credit.
Thanks otherwise though for the advice to pass along the statement with expenses highlighted.
carmicha, could you explain point 1 more?
posted by Imperfect at 1:41 PM on January 21, 2010
In Canada, we have a very strict difference between debit cards and credit cards - debit cards can be processed through the Interac system and draw directly from your bank account, while credit cards are processed through the credit card system and draw from an extended source of credit.
Thanks otherwise though for the advice to pass along the statement with expenses highlighted.
carmicha, could you explain point 1 more?
posted by Imperfect at 1:41 PM on January 21, 2010
For tracking purposes (accounting and taxes, sure, but also for budgeting, future planning, etc.) it's good to know what your business is spending by category, e.g., office supplies, telephone, etc. But the category--or whether it's a one-time or recurring expense--may have very little to do with the vendor: knowing you spent $300 at Zeller's isn't nearly as useful as knowing you spent $50 on cleaning supplies and $250 on a printer. If you pay Zeller's via your credit card, you're not improving your data by recording it as such; you're just introducing an intermediate bit of noise into the system, because now your software tells you neither how you paid the bill nor what it was for.
posted by carmicha at 1:50 PM on January 21, 2010
posted by carmicha at 1:50 PM on January 21, 2010
Ah, thanks very much. In my case, the vendor strictly details what the expense is. Linode = site hosting, Google = AdWords, etc. I do keep track of what "type" of expense that is, but it's excellent advice going forward to keep detailed notes on what the expense is for, thank-you.
posted by Imperfect at 2:07 PM on January 21, 2010
posted by Imperfect at 2:07 PM on January 21, 2010
Imperfect: To Carmicha's point: In Canada, to most Canadians, a "Debit" card means their bank card - it's the one we use at the ATM, and it has generally nothing to do with either VISA or MasterCard. They all are part of Interac, which is the Canada-wide electronic payment system.... it hooks ATMs together, as well as POS terminals, both of which use the same PIN. It will also generally be part of PLUS or CIRRUS for international ATM usage.
It's actually quite difficult (well, harder anyway) to obtain a US-style Visa or MC "Debit" card from a Canadian bank - partly because there isn't much market for it - the only reason to get it is if you travel a lot and can't qualify for a credit card. I believe we call them "Cheque cards" too. (At least, that's how it was 10 years ago when I last lived there).
I believe (not certain here ) that we had a national electronic debit system quite a while before either visa or MC got on the "Debit" bandwagon.
posted by TravellingDen at 3:04 PM on January 21, 2010
It's actually quite difficult (well, harder anyway) to obtain a US-style Visa or MC "Debit" card from a Canadian bank - partly because there isn't much market for it - the only reason to get it is if you travel a lot and can't qualify for a credit card. I believe we call them "Cheque cards" too. (At least, that's how it was 10 years ago when I last lived there).
I believe (not certain here ) that we had a national electronic debit system quite a while before either visa or MC got on the "Debit" bandwagon.
posted by TravellingDen at 3:04 PM on January 21, 2010
In the financial system I use, I would enter an expense claim for the stuff I bought on my personal card. Then when I paid the claim (paid the card from business funds) the software would record the recipient (WidgetsRUs) and category (widgets) as well as satisfy the claim. This keeps track of the fact that the action took place on my personal card--it explains why there are no downloaded financial transactions that show me paying the money directly to WidgetsRUs.
posted by PatoPata at 3:25 PM on January 21, 2010
posted by PatoPata at 3:25 PM on January 21, 2010
To clarify: that would be a separate claim for each item I bought with my personal card, so there would be separate transactions recording the appropriate recipient and category. This seems like it would be handy in an audit because it shows every step of the money trail, but I'm not familiar with how the Canadian authorities treat business finances or how likely you are to face an audit. The software I use is Xero, which is designed for business use.
posted by PatoPata at 3:30 PM on January 21, 2010
posted by PatoPata at 3:30 PM on January 21, 2010
My wife and I both have our own businesses (sole proprietorships) and we've never bothered with setting up separate accounts. We just have an appropriate hierarchy of accounts in our accounting software (e.g. Personal:Tools, Business:Wife:Tools, and Business:Husband:Tools) and debit purchases from into the right one. Not sure how other accounting software works, but with GnuCash this is easy (I'd imagine any other double-entry accounting system would also be). We sometimes buy things for personal use and both our businesses at one place in a single transaction, but it's still no problem because GnuCash allows splitting a transaction. At tax time, I just make a report for each of the accounts and give it to my accountant. He's never had a problem with it.
posted by Emanuel at 3:40 PM on January 21, 2010
posted by Emanuel at 3:40 PM on January 21, 2010
Call your current credit card company and see if they'll issue you a second card on a separate account, for your business. They may want to split your current limit across two cards.
posted by Jacqueline at 3:58 PM on January 21, 2010
posted by Jacqueline at 3:58 PM on January 21, 2010
PatoPata's system also enables the company to use one check to reimburse him for all valid obligations, including (but not limited to) expenditures made on the firm's behalf and documented via the expense report claim, regardless of how/whether he paid for them (e.g., card/check/cash), which is irrelevant. [In the US, one example of a reimbursable not attached to an expenditure per se would be mileage incurred on a personal vehicle for a work-related matter.] The company's obligation to PatoPata ends when it reimburses him; whether he uses the funds to pay off his credit card or bets it on the horses matters not.
Oh and for further bookkeeping simplicity, if you have clients, it may be worth it to you to fill out separate expense report claims for items associated with each one, plus another one for items that are company-related expenditures; it may help come invoicing time. Whether you write separate checks for each expense report to make it even easier to track things is up to you.
posted by carmicha at 4:04 PM on January 21, 2010
Oh and for further bookkeeping simplicity, if you have clients, it may be worth it to you to fill out separate expense report claims for items associated with each one, plus another one for items that are company-related expenditures; it may help come invoicing time. Whether you write separate checks for each expense report to make it even easier to track things is up to you.
posted by carmicha at 4:04 PM on January 21, 2010
As carmicha points out, the expense claim works for mileage incurred on client trips. When a client requires me to drive somewhere, I enter the value of the mileage as an expense claim in my software (charged to "travel") and list the charge on the expense reimbursement invoice sent to the client, which is separate from the invoice for my consulting fees. (My accounting software also invoices.) When the client pays, the correct portion of the payment is automatically charged to travel, canceling out the "expense." Importantly, the reimbursement from the client also isn't tagged as income, so it won't show up at tax time as taxable income.
Mileage that applies to my own business (e.g. driving to the store for printer toner) is tracked separately and deducted as an expense at tax time. I use an iPhone app for that.
Sidetracking here: Like Emanuel, I used one bank account and kept all the data in one database for years. However, separating them into business and personal, and switching to business-oriented financial software, has made it way easier to create profit & loss statements and otherwise see how my business is performing--return on investment and all that. And when I can easily see the profits from my decisions, I'm more motivated to make more decisions that improve profits. I'm a one-person LLC taxed as a sole proprietor in the US.
posted by PatoPata at 9:17 AM on January 22, 2010
Mileage that applies to my own business (e.g. driving to the store for printer toner) is tracked separately and deducted as an expense at tax time. I use an iPhone app for that.
Sidetracking here: Like Emanuel, I used one bank account and kept all the data in one database for years. However, separating them into business and personal, and switching to business-oriented financial software, has made it way easier to create profit & loss statements and otherwise see how my business is performing--return on investment and all that. And when I can easily see the profits from my decisions, I'm more motivated to make more decisions that improve profits. I'm a one-person LLC taxed as a sole proprietor in the US.
posted by PatoPata at 9:17 AM on January 22, 2010
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And do get another credit card just for business needs. It doesn't have to be a "business credit card," although in a lot of cases those are really personal credit cards under another name anyway -- it can be another personal card, just as long as you use exclusively for the business. It will be a lot easier to track your business expenses in the future.
posted by kindall at 1:21 PM on January 21, 2010