Where this can get tricky: Making personal purchases (like a haircut) on a business account is not a problem as long as you include the spending in your payroll as a fringe benefit. Suggested Reading: 7 Accounting Tips for New Small Businesses In this scenario, once the IRS caught this kind of spending, they would treat this as disguised compensation, which would be subject to payroll taxes and potential interest and penalties owed down the road. You cannot deduct items like a haircut, a trip to the salon, or new clothes as a business expense, even if it is to look fresh for an upcoming business meeting. (For more on fringe benefits, be sure to check out The Ins and Outs of Fringe Benefits – What Is Non-Taxable?on HR and payroll provider, Justworks’ blog.) The IRS’s Employer’s Tax Guide to Fringe Benefits defines a fringe benefit as “a form of pay for the performance of services.” In their eyes, this personal expense is just as much a form of compensation as their salary. Instead, if you were to purchase personal items through a company account, they should be fringe benefits that are subject to payroll taxes. This is known as “commingling your books” and is a huge no-no as well as one of the most common ways businesses find themselves on the barrel end of an IRS or state audit.Īccording to the IRS, personal expenses are not eligible business expenses deductible against taxable income. Visit our Entrepreneur’s Guide to Accounting for more valuable articles like this one to help you build the right foundation for your business financials.One of the most common problems we see from startup founders who are first moving away from DIY accounting is a wide range of “personal transactions” being made with the business accounts. Plus, learn more about our Business Compass Program to take control of your small business financials and have them start working for you. If you find yourself commingling and need help with cash flow management give us a call and we’ll work with you to help you make sure your business runs smoothly. Keeping funds and expenses separate will help diminish the possibility of legal or tax problems in that area.Īs always, having time to focus on what matters most- running a profitable business is no easy task. Keeping and understanding your accounting records will be beneficial to you in the long run. while making sure to not pay any personal expense with your business bank account and vice versa. Use a business checking account to pay for expenses such as inventory, employees, any assets, etc. Have exclusively a business bank account and credit card.
So, the lender could have concerns about giving a business loan or a personal loan as they can be sure of the funds for payment or how the funds from the loan would be used.Īlways keep your business and personal funds and expenses separate. Also, because the practice is outside the tax rules, there could well be additional scrutiny during an IRS audit that could include both your personal and business accounts.Ĭommingling funds could also complicate getting a loan as it creates the lack of distinction between business and personal transactions. This could include paying for personal expenses straight from the business accounts hitting the ATM for cash that will be used for personal reasons mixing the use of a credit card for both business and personal reasons or transferring money between business and personal accounts without clear records of the transactions.īy commingling your funds, you could be at risk of losing any liability protection better known as “piercing the corporate veil.” This would allow someone to sue your business and be able to have your personal assets attacked as well. But many business owners commingle the funds in the legal sense by simply treating the business account as personal funds. The Complete Guide to Strengthening Your Business Financial FoundationĪnother important reason to keep these funds and transactions separate would be the very real risk of ruing the legal liability protection in place for the business.Ĭommingling literally is taking personal and business funds and mixing them.Settle Your IRS Debt for Less Than What You Currently Owe.Accounting Services for Small Businesses.
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