When you’re the owner of a small business, your own finances are so strongly tied to your venture that the line between personal and business expenses may become blurred.
However, this can land you in some trouble when it comes to taxes. We find out what you can do to stay out of trouble.
Tip: Compare banking products and find out which accounts will help you separate your finances.
Are you allowed to mix expenses?
According to Reagan Mitchell, managing director at WealthyMe, small business owners who draw a salary from their business should be part of the company’s payroll and are liable for taxes.
In other words, you cannot run your personal expenses through your business. You need to pay yourself a salary from your business – which has your personal income deducted – and then spend your after-tax salary from there.
“Small business owners are legally required to separate business expenses from personal expenses. The Income Tax Act does not permit a person to claim personal expenses in the production of income,” says Mitchell.
He explains that if a person is found to claim personal expenses as a business expense, it would be deemed as tax fraud or tax evasion.
It’s not always clear cut
Mitchell says that in some instances, it’s difficult to make a clear distinction between business expenses and personal expenses.
“A small business owner may use a cellphone contract for business and personal use and trying to determine calls made for business and personal may be technically impractical. It’s then not illegal to claim the cell phone expense as a business expense,” he says.
“The danger associated with running personal expenses through your business is that you might at some point be subject to a South African Revenue Service (SARS) audit and this may get you into trouble with the tax man.”
He advises small business owners to source proper tax advice to legally optimise their tax liability. Find out how you can choose the right tax practitioner for you.
“During COVID-19, many small business owners moved their business operations to their homes and this resulted in them using their personal spaces for business,” says Mitchell.
“In a situation like this, there are legal ways to deduct expenses related to you operating your business from home. Expenses may include a portion of interest payments on your home loan, utilities, phone line, and so on,” he explains.
READ MORE: Working from home? Set up your home office like this
Getting audited by SARS
Mitchell says that in a situation where SARS conducts an audit on the small business owner's affairs and finds irregularities with fraudulent tax deductions, SARS will order the business owner to repay the tax deductions that were associated with those transactions.
“In addition to this, SARS may institute criminal charges against the business owner, which may result in that business shutting down,” says Mitchell.
“It is therefore imperative for small business owners to seek professional tax advice and to make use of ethical tax practitioners,” he adds.
When last did you check your income tax liability? Have a look at our tax calculator.