Tax season always gives us an opportunity to reiterate the importance of keeping personal and business expenses separate to our clients.
To be fair, we do our best to keep on this issue all year round! But it is in tax season that it takes on a certain level of weight.
Not keeping your personal and your business accounts separate is a red flag to the IRS for an audit. Beyond a headache that an audit can give you, it is important to keep these accounts separate in order to streamline your day-to-day accounting and bookkeeping needs.
This is really a great place to start with your business accounting!
Why Should I Keep these Accounts Separate?
- Piercing the Corporate Veil – If you do not keep your business and personal accounts separate, someone can claim that there is no difference between the corporations and the business owner.
- Better financials – When personal expenses are mixed into business, it doesn’t represent the true performance of the business. While many owners like to enjoy “perks” of business, go too far and you can lose visibility that is critical to good decisions. Also, if you think you might sell your company or require bank financing in the next 5 years, business expenses running through the business can make financing more difficult and business valuations lower than they should be.
- IRS Trouble – The Balance suggests that a “lack of separation shouts ‘hobby’ to the IRS. And the IRS is quick to deny deductions and losses for hobbies.” Protect yourself by drawing the line.
- Avoid an Audit – It isn’t a sure-fire way to avoid an audit but maintaining well-kept books certainly helps! While you should always consult your CPA for tax advice, mixing business and personal expenses is a great way to keep the audit lasting longer.
- Keep Accounting Fees Down – The more organized your business is when you hand it over your books to a bookkeeper and CPA the more likely you are to avoid hefty fees. [it is easier for us if we know every transaction is business related]
- Professionalism – No vendor wants to receive a payment with your cat-themed checks (as fun as they may be!). Add an element of professionalism by keeping your business checks and cards in more standard designs.
Here are some tips for keeping these accounts separate:
- Maintain Separate Checking Accounts – even if you are just starting out, it is a good idea to talk to your bank about getting set up with a personal and a business account. This step can greatly help to improve your record keeping by ensuring that all expenses are in the right place and will keep it so that if you have a sync set up with your bookkeeping software the correct information goes into the record.
- Get a business credit card ASAP – not only is this a great first step to establishing good business credit (making it more likely that you will qualify for business loans with lower rates) a business credit card simply makes it more difficult to spend in the wrong account. You do have to make sure, though, that this business card is kept for strictly business expenses!
- Pay Yourself – Setting up a salary for yourself, or (in the case of sole proprietors, members of partnerships, and LLC owners who are not eligible to receive a salary) making draws, in a routine manner helps to keep the lines more solid between personal and business finances.
Document any mistakes that get made!
Even with some of the best-kept books by the most organized people, mistakes happen. Just ensure that your transactions that are accidental are recorded correctly and you shouldn’t run into any large problems.
How Can We Help?
We like to think that having a great bookkeeping team on your side helps to make your business run smoothly, maximize growth, and keep your business expenses organized. If you do not already have a bookkeeping team on your side you can reach out to us here. (P.S. We are always happy to recommend local tax services, we work with them all the time!)
Note – this is information for educational purposes and is not supposed to constitute advice. If you need tax or financial advice please reach out to a licensed professional.