Skip to content
  • There are no suggestions because the search field is empty.

Business or personal? Keeping the two apart

How to tell business costs from personal ones, where a personal charge goes, and which deposits are income.

A business expense is deductible when it is ordinary and necessary and paid or incurred in carrying on the business; personal, living and family costs are not, whichever account paid them. A cost used both ways counts only for its business share, and not every deposit to the business account is business income.

Last reviewed September 24, 2026 · Tax year 2026 · Federal

Whether a cost is a business expense turns on what it was for, whichever account or card paid it. Money coming in needs the same sorting, because a deposit to the business account can be income, your own money or a loan, and the bank statement shows all three the same way.

The test

The Code allows a deduction for the ordinary and necessary expenses paid or incurred in carrying on a trade or business. The IRS reads ordinary as common and accepted in your field, and necessary as helpful and appropriate for your business; it does not have to be indispensable. Personal, living and family expenses are not deductible.

Groceries and household shopping are personal. So is the rent on your home, unless you use part of the home as your place of business and meet the home office rules, and then only that part can count.

Used both ways

If an expense is partly for business and partly personal, you separate out the personal part, which is generally not deductible. For a vehicle the IRS lets you divide by miles driven. An illustration, with round numbers: you are self-employed, deduct actual car expenses, and drove 10,000 miles in the year, 6,000 for the business and 4,000 personal, commuting included. Then 60% of the cost of running the car is a business expense, and 60% of the interest on the car loan. A phone plan or internet service used both ways is split the same way, business part from personal part, though basic local service on the first telephone line into your home is always personal.

Cars carry a stricter record rule. A passenger car is listed property, and no deduction is allowed for it unless you can show the amount, the time and place and the business purpose, with adequate records or sufficient evidence backing your own statement. The IRS names an account book, diary, log or trip sheets as the kind of record it means, kept at or near the time.

A personal charge on the business account

In the sample recordkeeping system in IRS Publication 583, personal expenses are not paid from the business account, and any that is paid from it still gets recorded in the books, though it cannot be deducted as a business expense.

For a sole proprietor, or a single-member LLC taxed as one, the charge goes to the drawing account, which records business money taken out for personal and family expenses. Cash taken out for yourself is a withdrawal too. Cash that pays a business expense needs the receipt, or, if you cannot get one, an adequate explanation written in your records at the time of payment.

A partnership or corporation cannot deduct an owner's personal charge as a business expense of its own. How it is treated instead depends on the tax classification; the classifications are in What is my tax classification and what does it mean?

Deposits

Gross income is all income from whatever source derived, including income from business. Some deposits are not business income: money you put in yourself, loan proceeds, a transfer from another of your accounts, a personal check deposited by mistake. Money borrowed through a bona fide loan is not income. The IRS says your records should identify the source of each receipt, because you need that to separate business from nonbusiness receipts and taxable from nontaxable income, and suggests marking deposits as business income, personal funds or loans.

Keeping them apart

The IRS recommends a business checking account kept separate from your personal one, and a card used only for the business does the same for card charges. When a personal charge does land on the business account, tell your bookkeeper which charges they are, so they are recorded as personal and left out of expenses. Do the same for any deposit that was not a sale. If KFM keeps your books, send receipts and statements through the client portal, not by email.

How long to keep those records is in Receipts and how long to keep records.

Sources

  1. IRC § 162, trade or business expenses
  2. IRC § 262, personal, living, and family expenses
  3. IRC § 274, disallowance of certain expenses (substantiation, subsection (d))
  4. IRC § 280F, limitation on depreciation for luxury automobiles; listed property defined
  5. IRC § 61, gross income defined
  6. IRS Publication 334, Tax Guide for Small Business (for 2025 returns)
  7. IRS Publication 583, Starting a Business and Keeping Records (Rev. December 2024)
  8. IRS Publication 463, Travel, Gift, and Car Expenses

This article is general educational information, not tax, legal, or accounting advice, and does not create a client relationship. Tax law changes and depends on your specific facts. Information is current as of September 24, 2026 for tax year 2026; verify before acting. Consult a qualified CPA, EA, or attorney about your situation.

Still need help? Ask in the client portal or email support@kfmus.com.