You’ve started your own business and you’re ready to go. With all the things you have to do to keep this business going, you set up a business account that you occasionally use for personal expenses. No harm, no foul right?
But, it’s all my money.
Doesn’t matter. If you are mixing business and personal expenses, you could land in a heap of trouble with the IRS if you aren’t accounting for the expenses properly.
What’s a business expense?
The IRS defines business expenses as ordinary and necessary costs of carrying on your trade or business. Seems reasonable, right?
So what happens if mix business and personal?
We’re not saying you can’t mix business and personal, because you can. However, you need to account for the personal expenses properly – like a distribution. Also, make sure you are keeping the supporting documentation (invoices, receipts, etc.) for your business expenses because the burden of proof is on you. Yes, you need to prove that your business expenses are legitimate; in this case you are guilty until you prove you’re innocent.
If you pay personal expenses with your business account and categorize them as business expenses, you are reducing your taxable income by the amount of those personal expenses. Therefore, you are improperly reducing your tax liability, resulting in remitting the incorrect tax payment to Uncle Sam (and then we are talking penalties and interest).
We sincerely hope that if you’ve been doing this it’s not deliberately. Because if it is, that’s also known as a little thing called tax evasion … and then Uncle Sam isn’t the only person who will want to talk to you.
On the flipside, you can also be missing legitimate business expenses by paying with your personal account.
In this video, Selina Hansen, Business Outsourcing and Strategy Manager, discusses one thing business owners should know to help manage the financial side of their business.
The moral of the story.
We recommend keeping it simple and don’t mix business and personal. You should have a personal account for personal expenses and a business account for business expenses. We understand that, in some cases (which are hopefully rare), mixing may be unavoidable. However, make sure you account for the personal expenses in the proper manner on your financials.
Keeping business and personal separate can help you stay out of harm’s way in the case of an IRS audit.
Take a deeper dive into this Insight’s subject matter.Business Outsourcing & Strategy