One of the most challenging temptations facing business owners is money mixing—mixing personal and business funds. This scenario is easy to find yourself in if you’re a sole proprietor or a single-member S corp.
If you’re not disciplined in separating your business funds, you can open yourself up to unnecessary scrutiny by taxing authorities, particularly the IRS in the USA.
Commingled and misappropriated business funds are frowned upon—a terrible situation to be in. Not only is the IRS not pleased with the situation, but your tax person won’t be excited to sort out a money mess.
The IRS wants you to know the rules for business expenses. Publication 535 provides guidelines for deductible business expenses. There are obvious business expenses, and some not so obvious.
Typical deductible expenses include costs like office supplies, advertising, and legal fees. Choose wisely and consult with your tax preparer. Save receipts, invoices and supporting documentation. If you use your vehicle for business purposes, either maintain written documentation or use an App such as MileIQ.
The best practice is to keep funds separated by having a defined set of business books, even if you’re a sole proprietorship. That requires a separate business bank account.
As well, if credit cards are used for purchases, use a separate credit card for business expenses. Having a separate business credit card keeps your financial information well organized.
Also, if you provide capital for your business from personal funds, be sure not to count that money as Income if that money is deposited into a business account.
If you are associated with a corporation, keep personal transactions at arm’s length from the business entity. Avoid personal purchases from the business, as this will keep you separated from the corporation.
Always keep in mind that business funds are for business purposes, never personal. This measure will avoid tax time challenges and provide an indisputable audit trail.