When my clients first start their business, I beg them to open a separate bank account for business transactions. If you started a corporation right away, you had to do this by law. That works! But what happens when you start using the business account like it’s your personal bank account? There are reasons you need to separate your business transactions from your personal transactions. You’re probably thinking it’s your money, right? You should do with it what you want? Wrong answer. Here are my top reasons you need to separate your business from your personal transactions.
Here’s how I see it from an accountant’s point of view. Each month, when we download your bank and credit card data into QuickBooks, we have a list of transactions that we need you to clarify. We contact you and ask, “What is the charge to Macy’s for?”. You respond, “Oh, that’s personal”. If you are a corporation, this is immediately classified as you taking money out of the corporation. Taking money out of a corporation should be a deliberate tax planning action. Not a usual day to day thing. Continually taking personal cash and charges out of the corporation makes it difficult for your accountant to help you tax plan for the present and future.
Numbers Don’t Lie
You’d be surprised each month to see how much cash goes flowing out via personal expenses. When I show clients who are new to tax planning the list of personal items they charged to the business each month, they are usually shocked! Some even try to deny it or say it can’t be right. Numbers don’t lie. After the shock, we try to steer them in the right direction with some budgeting and tax planning so that they can get a handle on things.
All Types of Businesses Need Apply
Not a corporation yet but a sole proprietor? It’s true you don’t need to have a separate bank account, but it is heavily suggested by the IRS. I know we all hate that the IRS tells us what to do with our money, however, they are right on this one. If you mix your personal and business transactions together, it’s hard for your accountant to back up your business numbers that you report on your tax return. This leaves us scrambling in an audit.
Say you are called in for an audit on your non-corporate sole proprietor business. The IRS is asking about the $3,956 in office supplies you list on the Schedule C on your 1040 tax return. They want receipts. You have some receipts but then state, “Hey, I bought these via debit card, I’ll just show where they came out in my bank statements.” Hopefully, you show these to your accountant first. But what happens now? Your accountant asks, “Joe, what are all of these other bank deposits that show up in your bank statements that are over and beyond the income you are stating?” You reply, “Well, that’s my wife’s paycheck, that’s a gift from my Dad, etc…” Guess who else is going to ask these questions and be a lot less nice about it and take longer on your audit? Yep, the IRS. Believe me, you don’t want the IRS to see any of your personal items when you present your bank and credit card statements for audit. You may be on the up and up, however, they will make you pay dearly just because you didn’t open a separate bank account just for business transactions.
So, go to your bank, get that business bank account and make sure your personal and business transactions are separated. Not only will this save you in an audit but help you budget for your business’s future. Why budget? That’s my next article…
Trust me, I know all these points for a small business owner can be overwhelming! Click here to book a free call with us and we can help you get started. If you are looking to hire an accountant, here are 5 questions to ask that nobody tells before you hire one.