Is it time to put your small business in its place? For many business owners, the answer is yes, and here’s how to do it.
The “place” we’re talking about comes from a separation on all legal and official records between your business and your personal income and expenses. The rightful place of a business is by itself – not comingled with your personal life. Putting your business in its place is really as simple as running your business completely separate from everything else in your world. Why is this so important?
Welcome to the IRS
First, understand that the IRS is happy to extend all the rights, privileges and obligations to anybody who starts and then runs a business. That means you can deduct reasonable and necessary expenses on your tax return while making essentially as much money as you can.
The problems begin when you begin mixing your business and personal monies. For example, if you pay for business expenses from a personal bank account and then claim these expenses on your tax return, an IRS audit might raise some sticky questions.
While the government is willing to allow you appropriate deductions, its representatives are not happy when expenses are being paid for from accounts that aren’t dedicated to the business. For the same reason, they’ll see a bunch of red flags going up when claimed income is fed into non-business bank accounts.
Additionally, your tax program or professional accountant may find some great deductions that you can take, but if you can’t confirm that those expenses were paid for by your business (as opposed to you, personally), you’re going to miss out on those deductions.
It’s easier to do it right, in the long run
Some people – especially those who run very simple businesses with little overhead and other expenses – think it’s easier to comingle the money coming into and going out of their businesses. They pay expenses through whatever account is most convenient at the time, and they channel revenue into whatever account they believe it will do the most good.
Comingling problems most often occur in small sole proprietorship entities, where the perceived line of separation between business and personal monies is thin and vague. In this case, comingling funds can run you into trouble. In the case of a limited liability corporation or a partnership, comingling can run you into very serious trouble, because in these latter cases, you are legally considered totally separated from your business.
The way to avoid all these and other potential problems is to put your business in its place – meaning, separate business and personal accounts and never cross over between them. Be diligent and committed, and you’ll have one less headache – the IRS – to deal with come tax time.
Cotton Mather of Pittsburgh is a professional accounting and tax consulting firm serving businesses and individuals. Can having a trained financial expert on your side help your life run more smoothly? Find out. Call (412) 931-1617 to get your questions answered.