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Commingling funds and why it can negatively affect your business.

Let’s talk bank accounts, credit cards and commingling business and personal funds.  Commingling is a fancy term used for mixing funds that should be separate including

  • Depositing business related checks into your personal account.
  • Paying personal expenses from your business account
  • Sharing one bank account for business and personal accounts

So why shouldn’t you co mingle funds?  Other than the fact that it makes life difficult for you and it stresses your accountant out, it has some very adverse effects on your business.  The first being a very important factor in why you should take this simple step to help your business for the long term.

1. Commingling funds can put you under the hobby business classification

The IRS stipulates that only businesses can deduct business expenses, and there are specific guidelines for determining the difference. If the expenses you incur for your business go through your personal bank account, you may give the IRS the impression that your business is actually a hobby.  If you are audited, you may have a hard time convincing the IRS you are a business.  In that case, all the income becomes taxed without any expenses to offset it.  So, if your business originally had $25,000 in income and you had $15,000 in expenses, you would have $10,000 taxed. If you get classified as a hobby, the full $25,000 would be taxed.

The below list is the 9 determinations on whether the company is determined to be a hobby or a business – https://bit.ly/2mHfj2g 

  • Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records (hence me talking on and on and on about bookkeeping)
  • Whether the time and effort you put into the activity indicate you intend to make it profitable
  • Whether you depend on income from the activity for your livelihood
  • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
  • Whether you change your methods of operation in an attempt to improve profitability
  • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business
  • Whether you were successful in making a profit in similar activities in the past
  • Whether the activity makes a profit in some years and how much profit it makes
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity

2. Tax time issues

When tax time comes around and you have to declare your income and expenses related to your business, all of your personal transactions will have to be separated from your business ones. Now imagine how much you are going to get charged by a bookkeeper or CPA to go back through all of that. Not only is it going to be costly, but it is also going to take up a heap of your time.  Just picture the amount of time you are going to have to spend answering their questions.  “Was this $48.94 Olive Garden bill on 5/18/2019 a business expense or a personal expense?”  “No Karen, it was personal.  I just like pasta, okay?”  As an accountant, if this came to me, I would charge a premium.

A rule measuring the word business with length and width measurements

3. Limited audit trail

The U.S. government doesn’t stipulate that you have to separate funds or even separate record-keeping. It does require that whatever method you use, you can show that all records are accurate, complete, permanent, and show clear record of income and deductions. Providing a business statement helps provide that.

4. Commingling funds can cause you to miss deductions

Commingling causes your bank statements to be a mess, and that makes it hard for your bookkeeper or accountant to decide what expenses were business and what expenses were personal.  This also makes it easy to overlook deductions. Additionally, if you don’t have receipts for your expenses, your accountant or CPA who is cleaning things up will err on the side of caution and make something that could very well a business expense a personal o

5. Doesn’t help build business credit

Having a strong credit score for your business allows for you to get a loan, line of credit, credit card etc. if that need ever arises.  If you can get a good credit score for the business by having correct financials, eventually you won’t have to leverage your personal credit to be able to build the business. Commingling funds does the opposite of this it doesn’t establish a separation between the business owner and the business so ultimately you would end up using your own personal credit

6. I can't get a business bank account or credit card what should I do?

Get a personal bank account and credit card and use it ONLY for the business.  You or your accountant will be able to track the expenses and income this way. This holds true for credit cards lines of credit loans all of the above as long as the funds are used for the “Solely” for the business you can track it. 

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