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Tips & Best Practices

Handling Mixed Personal and Business Transactions

· 5 min read

Personal expenses in business accounts happen—especially for small businesses and sole proprietors. Here's how to handle them properly in TraceEntry.

Why Separating Personal and Business Matters

Tax Compliance

Personal expenses are not tax-deductible. Including them in business expenses is a red flag for IRS audits and can result in penalties and back taxes.

Accurate Financial Picture

Mixed transactions distort your profit margins and expense ratios. Clean books help you make better business decisions.

Legal Protection

For LLCs and corporations, mixing personal and business funds can "pierce the corporate veil"—putting personal assets at risk in lawsuits.

Common Mixed Transaction Scenarios

Personal Purchases on Business Card

The business owner uses their business credit card for personal purchases like groceries, entertainment, or personal travel.

Business Purchases on Personal Card

Business supplies or services paid with personal funds that need to be reimbursed to the owner.

Split Transactions

A single purchase that's partially business and partially personal—like a phone bill for a device used for both, or a meal with clients and family.

Owner Draws and Contributions

Money transferred between personal and business accounts that aren't really expenses—they're owner equity transactions.

Identifying Personal Transactions

Vendor Clues

Certain vendors are almost always personal:

  • Grocery stores (unless you're in food service)
  • Clothing retailers
  • Entertainment venues (movies, concerts)
  • Personal care (salons, gyms)
  • Streaming services (Netflix, Spotify)

Transaction Patterns

Look for patterns that suggest personal use:

  • Weekend transactions at retail stores
  • Recurring subscriptions that aren't business-related
  • Transactions in locations far from business operations
  • Round-number ATM withdrawals

Amount Red Flags

Unusually small or large amounts for certain categories:

  • $5 coffee runs (personal) vs $50 team coffee (possibly business)
  • $200 dinner (personal family meal) vs $200 dinner with documented client
Tip: When in doubt, ask your client. A quick email clarifying a few transactions is better than guessing wrong.

Categorizing Personal Transactions in TraceEntry

Option 1: "Owner Draw" or "Personal" Category

Create or use a category specifically for personal expenses. This keeps them in the books but clearly separated from business expenses.

  • Shows up on Profit & Loss as a non-expense line item
  • Easy to filter out for tax reporting
  • Maintains complete transaction history

Option 2: "Due from Owner" Asset Account

If the owner owes the business for personal purchases, categorize to a receivable account. This creates a balance sheet entry showing the debt.

Option 3: Exclude from Export

Flag personal transactions during review and exclude them from your final export. Useful when the client handles personal transactions separately.

Handling Split Transactions

The 100% Rule

The IRS doesn't allow partial deductions for most expenses. If a purchase is even partially personal, the safe approach is:

  • Home office: Calculate exact square footage percentage
  • Vehicle: Use mileage log for business vs personal miles
  • Phone/Internet: Document business use percentage
  • Mixed meals: Only deduct the business portion

In TraceEntry

For split transactions, you have two options:

  1. Categorize the full amount to the business category, then adjust the percentage in your accounting software
  2. Create a note during review indicating the split percentage for later adjustment

Owner Draws and Contributions

What Are They?

Owner draws are money taken out of the business for personal use. Owner contributions are personal funds put into the business. Neither are expenses or income—they're equity transactions.

How to Identify

  • Transfers to/from accounts with the owner's name
  • Check payments to the owner (not payroll)
  • ATM withdrawals (often personal draws)
  • Deposits from personal accounts

How to Categorize

  • Draws: "Owner Draw" or "Shareholder Distribution"
  • Contributions: "Owner Contribution" or "Capital Contribution"
Note: For S-Corps and C-Corps, owner payments have additional rules. Consult with a tax professional about proper classification.

Best Practices for Clean Books

Advise Clients on Separation

The best solution is preventing mixed transactions. Recommend clients:

  • Use a dedicated business bank account
  • Get a business-only credit card
  • Reimburse themselves properly for business expenses paid personally
  • Take scheduled owner draws rather than ad-hoc personal purchases

Document Your Decisions

When you categorize a transaction as personal, note why. This helps during tax prep and if questions arise later.

Review Monthly

Don't wait until year-end. Monthly review catches patterns and allows you to address issues with the client before they accumulate.

Create a Personal Expense Report

For clients with frequent personal transactions, generate a monthly report showing what was categorized as personal. This helps them understand the impact and potentially change behavior.

TraceEntry Workflow for Mixed Accounts

  1. Process normally — Let the AI categorize everything first
  2. Filter by vendor — Check known personal vendors (grocery, retail)
  3. Review uncertain items — Look at low-confidence transactions
  4. Bulk recategorize — Move all personal items to "Owner Draw" at once
  5. Flag for client — Note items you need clarification on
  6. Export with categories — Personal items clearly labeled

Communicating with Clients

Initial Conversation

When onboarding a new client, discuss expense policies:

  • "Do you use this account for personal expenses?"
  • "How would you like me to handle personal charges?"
  • "Can we set up a separate card for personal use?"

Monthly Updates

Include a summary of personal transactions in your monthly report:

  • Total personal expenses this month: $X
  • Items needing clarification: [list]
  • Recommendation: Consider reimbursing the business $X

Year-End Summary

Provide an annual summary of personal transactions for their records and tax preparer.

Clean Up Your Mixed Transactions

  1. Identify accounts with mixed personal/business transactions
  2. Process through TraceEntry with "Owner Draw" in your category list
  3. Review and recategorize personal items
  4. Export with clear personal/business separation
  5. Discuss separation strategies with your client

Need help with mixed transaction scenarios? Contact us for guidance.