Purchasing Equipment Question...

[JacksonRy]

Hello,

I have a quick question: I am attempting my hand at opening a photography studio and am looking to purchase some new equipment. Is it required that I make purchases for my business with only my small business banking account to claim the items on my business's taxes?

In other words, if I buy a camera rig out of my own pocket, can I claim it on my studios tax return?

I am the sole proprietor and my business will be located in Indiana, if those fact effect the answer.

Thanks,
-Ry-

[Spider]

Welcome to the forum, Ry.

[JacksonRy]

Thanks. It's great to be here.

[vangogh]

Welcome to the forum Ry,

If you're a sole proprietor you and the business are pretty much the same thing. When you fill out taxes you'll fill out the 1040 like usual, though not the EZ one. Instead of attaching a W2 though, you'll fill out the 1040 Schedule C, which is to determine your business income. There's a form 4562 for depreciation, which may be how you deduct the camera rig.

Since you're ultimately just filling out a personal tax form (the 1040) it really doesn't make a difference which account you use to make the purchase.

Having said that I still think it's a good idea to buy business items from the business account. It'll keep everything clearer for your own records and get you in good habits should you later change your business entity to an LLC say. I would think it's not too hard for you to transfer money from one account to the other. I have my personal and business accounts linked together online and can easily move money back and forth. I always use a credit card attached to the business account for business purchases and make sure to pay it off each month. I don't have to since I'm a sole proprietor like yourself, but I think it's still a good idea to keep the two separate.

[Evan]

What vangogh said is correct regarding the Schedule C. That is where you'd report your profit and loss. As a camera, for your studio, will provide you with a benefit of greater than one year, you'd need to capitalize it, and depreciate it over its useful life for tax purposes. This means that if your camera cost $1,000, you'll recognize a portion of that $1,000 over several years, as it will benefit you over that time period.

You do NOT need to use your business account in order to claim it. Though you should consider having the business reimbursing you, otherwise you can just consider it a contribution. But all in all, it's not a big deal if you initially made the purchase on your credit card. Just keep the proper documentation.

[Business Attorney]

Just to add one point to what vangogh and Evan said - as long as you are a sole proprietor and you keep adequate documentation, it makes no difference, either for tax purposes or otherwise, which pocket you buy business assets and supplies from. However, if you grow the business and decide to incorporate or form a limited liability company, keeping personal and business assets and liabilities separate is very important. Co-mingling personal and business assets can lead to piercing the corporate veil of the business, meaning you lose the advantage of limiting your liability to the amount you have invested in the business.

For that reason, as well as the ease of bookkeeping, it is better to develop good habits from the start. To the extent possible, you should try to pay business expenses and purchase business assets from your business account.

[Evan]

But strictly from an accounting perspective, it makes it much cleaner to just have everything done under the business checking account, or using a personal credit card exclusively for business transactions. When things start getting mixed and mingled, and you need an Excel spreadsheet to figure out who is "responsible" for what, then you should look into exclusively using it personally, or for business, not both.

Nothing is worse for an accountant at tax time to request bank statements or credit card statements for specific transactions, and to see your morning latte on the business checking account, or that after-work gin and tonic.

[vangogh]

Evan I'm with David on this. I think as long as you still keep good records it's not too hard to separate the business and personal. Morning latte's and after-work gin wouldn't be on the business card. I'm still a sole proprietor so I don't have to separate things, but I've gotten in the habit of using the business account for business purchases and personal account for personal purchases. In time I expect to incorporate in some fashion and it should be a more seamless transition for me when it comes to purchasing.

It hasn't been an issue so far when tax time comes, though I've generally done my taxes myself. Maybe my account will yell at me one day though :)

[Evan]

You probably also have an accounting system in place to track your income and expenses. For clients where I provide bookkeeping services, they try to include everything on business cards including these non-business transactions. As a sole proprietor, no you do not have to separate them. But remember it is YOU who has to defend the numbers on your tax return, and if you're audited and need to flood through pages of personal transactions because you decided that maintaining separate records wasn't important -- you won't be on their good side.

It is very important, especially for those with loose records to begin with, to keep as much activity as they can to a few separate accounts/credit cards. If you have a good accounting system, and can sort through the personal and business stuff in say QuickBooks, then you're in a better position.

[vangogh]

I'm ashamed to tell you how chaotic my records can be. All the money that enters or leaves my business does end up going through one of several online systems. I do have to manually enter some of that, but most is going to be easily found in my bank account or PayPal account. I keep all my bills and starting in February I spend an hour or so every weekend for the month gathering everything into one text file that shows income and expenses.

Then I start filling out the tax forms little by little until the last weekend before April 15th. My brother is an account so now I also send him that text file with enough time for him to fill out all the forms too. The first few years I wanted to do it myself to better understand what was involved. I'm slowly letting him do more of the work. One of these days he'll fly out here and set up a better system for me.

Sounds somewhat archaic and I know I should really be entering everything in an accounting program like Quicken or similar, but my text file has evolved over the years to where it's actually pretty easy for anyone to understand. At leas me and my brother can easily work with it.

I do agree completely agree about keeping the business and personal separate though. Again I know I don't have to, but I do have separate accounts and the money goes in and out of the right account.

[Evan]

The fact is you still have records of these transactions.

Say you were doing "side work" and deposited all those funds to your personal checking account, in addition to your regular paycheck going in there, your inheritance money, gift money from your birthday, etc. You bought software on one of your personal cards, paid it out of this checking account. Keep mixing and mingling this, and then come year.

You receive a 1099 for this "side work" which you swear wasn't nearly that much money. (Prove it.) What expenses did you have? "Oh, I think I paid for..." -- and this is when the light bulb goes off that there should have been SOME system. Whether it's an Excel spreadsheet, Notepad file, etc. -- keeping ANYTHING is invaluable to the preparation of your tax return, especially if you can summarize it by general "categories".

[billbenson]

I use my business debit card for purchases and all credit card charges and expenses come into and out of that card. I take money out of that account as needed. I periodically put 3 months or whatever time frames worth of charges I download into a mysql table. I have everything in one places that way and can write reports of the data as needed. It still needs refinement, but every april I make improvements. Receipts go in a box, but I have them. I don't really have very many business related expenses, so my taxes aren't bad.

I take my taxes to H & R block for 300 dollars. Some of the H & R Block offices with real accountants. I'm not referring to the people in Walmart every april that help people fill out the short form :)

[vangogh]

Very true Evan and I completely agree about keeping records. In fact that's what I originally said.


I think as long as you still keep good records it's not too hard to separate the business and personal.

All I was saying before was that as a sole proprietor it technically doesn't make a difference if you buy something on the business card or the personal card. You do need to keep a record of the purchase for taxes, but it doesn't really make a difference which account you use. However I do think it makes things easier for record keeping and also in preparation for the day you may incorporate to keep the business and personal money separate. Better to use the business account when business money is involved and the personal account when no business money is involved and move money from one to the other where appropriate.

It's not necessary, but it's still a good habit to keep.

[Evan]

I take my taxes to H & R block for 300 dollars. Some of the H & R Block offices with real accountants.

H&R Block with "real accountants" is like saying that the Olive Garden is actually Italian food.