By Christi Rains
Follow these steps and eliminate tax reporting headaches!
There are so many reasons to not mix business and personal bank transactions and credit card expenditures on the same accounts. Whether you are a sole proprietor or have formed an entity, such as a LLC or a corporation, one of the first steps for the business is to establish a business checking account and lines of credit. These accounts should only be used for the business. They should not intermingle personal expenses and deposits.
This is something I run into all the time. It’s one of the first questions I ask a new client and one of the first requests I have before taking over their books. I beg of you, please don’t mix business and personal expenses or income. The consequences of this form of bad bookkeeping far outweigh any potential benefits:
- Personal transactions have to be entered into your accounting system in order for your bank accounts to be balanced. The only way to produce accurate financial statements is to pull those personal transactions from your personal banking. This can be cumbersome and confusing – resulting in unnecessary errors.
- Mixing your transactions will make tax time a nightmare. You are likely to end up filing without being able to claim all of the deductions you are actually owed. You also increase your chances of sending up a red flag with the IRS audit department, never a good thing. An audit could result in large fines and will most certainly place you forever on the IRS’s radar.
- The third reason has to do with the IRS again…imagine that. If you have formed an entity, such as a LLC or corporation, which offers personal liability protection, you can lose this protection. The IRS can ‘pierce the corporate veil’, which means you lose all personal liability protection, placing your personal assets at risk.
If you are currently mixing business with personal I hope you decide to stop doing this immediately. Trust me, it will streamline your bookkeeping and reporting, which I find to be invaluable.