Factoring 'business expenses' into personal budget

[Justin234]

I think there are a lot of small business owners here (including MMM of course). I've had a question for a while - how do you account for business expenses that are not exactly business expenses? I am not talking about actual fake expenses, like putting your new barbecue down as an office supply; I am talking about expenses that are essentially legit, but that you also use for personal use.

This question has two angles - personal accounting, and taxes. I'm thinking more about the personal accounting angle. E.g., in 2013 my family (two adults, three young kids) spent $36,000 (including housing). We were pretty pleased by this - could be better but I think taking housing into consideration it is comparable to the MMM family. However, like them, we run a business, and so there are certain things that don't get accounted for - clothes I bought for the business (file under: Uniform) I also use on special personal occasions; a monitor I bought for my home office I use for watching movies; and, for that matter, my home office, which I try to use for business work but is constantly invaded by children. Thus, there is a lot of "dark matter" - invisible spending. It legitimately counts towards the business, but also enhances my lifestyle, so should seemingly be accounted for in my family spending.

I am not trying to be anal about it - I don't actually track expenses that closely, but I want to be honest with myself, and I'm wondering if the words "business expense" in my head make it a little easier to confirm the odd Amazon purchase that I wouldn't normally justify under personal spending...

Any thoughts would be welcome...

[b4u2]

I have the same problem that you posted. I started a small business last year. I don't use all the space just for business where my pc is. I am a fitness coach so I opted to not use the desk as my office expense but the square footage of my workout area. So I had expenses for the workout area that were business yet also personal.

I wasn't sure about some items that I already owned. I did the fitness programs for 2 two years before becoming a coach so I had items before starting. So a lot of gray area for me as well.

[ShortInSeattle]

Hmmm... I don't think I have any personal expenses that double as business expenses. I don't believe my regular work wardrobe is deductible. (A suit or slacks isn't a "uniform" really.) I don't use my work machine for personal stuff, except for the occasional web site visited. My office does double as personal space, and so I don't take a home office deduction.

I suppose I draw a pretty black and white line between work stuff and non-work stuff, so there is no budget fuzziness. 

If you've got enough personal-benefit stuff coming from your business to impact your household budget, it might be worth double checking IRS rules.

[Justin234]

Hmmm... I don't think I have any personal expenses that double as business expenses. I don't believe my regular work wardrobe is deductible. (A suit or slacks isn't a "uniform" really.) I don't use my work machine for personal stuff, except for the occasional web site visited. My office does double as personal space, and so I don't take a home office deduction.

I suppose I draw a pretty black and white line between work stuff and non-work stuff, so there is no budget fuzziness. 

If you've got enough personal-benefit stuff coming from your business to impact your household budget, it might be worth double checking IRS rules.

You are probably right that I should check the rules. My general rule of thumb has been, "Would I purchase this if I were not using it for my business?" If the answer is "no," then I consider it an expense. (that oversimplifies the process, of course). I tend to think about the companies I've worked for and all the stuff that they put down as expenses - coffee for employees; travel expenses; wining and dining. In comparison, I think I am fairly frugal in what I spend, but since I'm not an accountant, I don't know the rules for each, and it's possible that the IRS wouldn't agree with me.

[Justin234]

Just to add, I think this issue probably depends on what type of work you are doing, and of course how strict you are. I originally thought about it re: MMM, in his summary of his annual expenses; but also when he mentioned business expenses for the blog; travel to S. America to discuss FIRE with other bloggers; construction work; and so on. I can't recall the exact post, but I think he did mention the benefit of putting things on the business card. Should he have two sets of tools, one for business, one for pleasure? Not sure what the IRS would say (I guess that's why I should hire a CPA), but common sense tells me "no."

[foobar]

Legally your supposed to only deduct the amount used for business. You spend 10k putting in a workout room and train clients 5 hours a week and work out on your own 5 hours/wk, you deduct 5k. I am betting that this is an area where a lot of people cheat. And there are exceptions. For example spend 10 mins doing personal taxes in that home office and it is no longer a home office and can't be deducted as the space is not used exclusively for business.

I have the same problem that you posted. I started a small business last year. I don't use all the space just for business where my pc is. I am a fitness coach so I opted to not use the desk as my office expense but the square footage of my workout area. So I had expenses for the workout area that were business yet also personal.

I wasn't sure about some items that I already owned. I did the fitness programs for 2 two years before becoming a coach so I had items before starting. So a lot of gray area for me as well.

[ShortInSeattle]

Also, if you take a deduction for a home office in a home that you own, you have to track depreciation and it will impact the taxes you pay when you sell the home.

http://www.bankrate.com/finance/money-guides/home-office-can-have-hidden-tax-costs-1.aspx

Check out your local SBA, many offer classes on business taxation.

[foobar]

Actually it is "If you have a home office". It doesn't matter if you take a deduction or not. 

Also, if you take a deduction for a home office in a home that you own, you have to track depreciation and it will impact the taxes you pay when you sell the home.

http://www.bankrate.com/finance/money-guides/home-office-can-have-hidden-tax-costs-1.aspx

Check out your local SBA, many offer classes on business taxation.

[milla]

My husband is a business. Anything that we use for our personal lives is not a business expense. We have an office from which he does work. We have a couple of servers, etc. I also use the office and I'm not his employee, it's not a home office. The server also hosts a personal site and stores personal documents/pictures,etc. He sometimes has to drive somewhere but he uses the same truck we use for personal use, his cell phone is used for business calls/Skype but he also uses it for personal use... so it's not really a business expense. It's not muddy at all, go over the publications that describe business expenses.
You're definitely going too far with "uniforms" there are specific guidelines for that.

[the fixer]

Since the question is not about taxes but about one's own personal edification, this how I see it:

If an expense is essential to my business, I consider it on my books a business expense. That does NOT necessarily mean I deduct it on my taxes, those are separate records. I don't think the IRS's quirky rules should have that big of an influence of how I handle my business' finances. So my internet connection? Business expense. Cell phone? Business expense. Computer? Business expense. The IRS does not consider these things 100% deductible, but that's irrelevant to me except during tax time.

This way I can ask two completely separate questions: what is the worst-case profitability of my business, and how am I doing on my personal spending? If I'm spending too much for Internet or need a new computer, those are business issues. I find that this encourages me to keep expenses realistic while also maximizing income to pay for all this stuff.

I also do this because, even if I use something like my Internet connection or computer for personal use, the business use usually trumps the personal. I can live with a slow Internet connection or quirky computer for my personal use, but that's unacceptable as a professional. The selection of these items has to be a business decision and my personal self lives with whatever it gets.