As a small-business owner, it’s easy for the line between “business” and “personal” to blur. Maybe you take a client to lunch, use your car for errands and business travel, or work from home. These mixed-use situations are common—and knowing what portion is deductible can save you money and help you stay compliant if the IRS ever asks questions.
Let’s break down how to tell what’s deductible, how to keep personal and business spending separate, and the best practices every owner should follow.
1. Understand What a “Mixed” Expense Really Means
A mixed expense is one that serves both personal and business purposes. Common examples include:
- Your cell phone or internet service – You likely use it for both client calls and personal scrolling.
- Your vehicle – Business mileage and errands get mixed with grocery runs.
- Home office space – You work from home but also use the same area personally.
- Travel – You attend a business conference, but tack on a few vacation days.
The key principle: you can only deduct the business portion.
2. Calculate the Business Portion
Once you identify a mixed expense, determine what percentage is truly business-related.
- For your phone or internet, calculate the percentage of time or data used for business.
- For vehicles, track mileage—IRS standard mileage rate or actual expenses both require records.
- For home office, calculate the square footage of the workspace divided by total home area.
Documentation is everything. The IRS allows reasonable estimates, but only if you have records to support them.
3. Best Practices to Keep Business and Personal Separate
Keeping clean books means fewer headaches later. Follow these habits to protect yourself and make tax time easy:
💳 1. Maintain Separate Accounts
Open a dedicated business checking account and business credit card. Never pay personal expenses from business funds—or vice versa. If a personal charge slips through, record it immediately as an owner’s draw or reimbursement.
📂 2. Track Receipts and Notes
For every deductible expense, keep a digital or paper receipt and jot down why it was business-related (e.g., “client meeting with ABC HVAC”). Apps like Dext or QuickBooks Online’s receipt capture make this simple.
🚗 3. Log Mileage Consistently
Use a mileage tracker app or QBO’s mileage feature to record business miles. Note the purpose of each trip and destination.
🏠 4. Document Your Home Office
Take clear photos, note square footage, and keep copies of utility bills. If you ever move, keep those records separate per address.
🧾 5. Pay Yourself Properly
If you occasionally use personal funds for business expenses, reimburse yourself from the business account with proper documentation. This keeps your books accurate and audit-ready.
4. When in Doubt, Ask or Allocate
Some expenses will always live in the gray area—like meals, gifts, or shared subscriptions. When you’re unsure:
- Allocate a reasonable portion for business use, supported by notes.
- Or check with your bookkeeper or CPA for guidance before claiming.
A little caution upfront can save you from larger headaches later.
5. Clean Separation = Clearer Financial Insight
Separating business and personal expenses isn’t just about compliance—it’s about clarity. When your books only reflect business activity, you get an accurate picture of profitability, cash flow, and spending habits. That’s how you make smart, confident decisions for growth.
Final Thoughts
Mixed expenses are part of every owner’s reality. The trick is to handle them intentionally—keep good records, separate accounts, and document how each expense serves your business.
If you’re ever unsure what qualifies—or need help reviewing your current setup—LMS Clean Books & Advisory can help you create a clean, tax-ready system that makes sense year-round.
