When we first meet with new clients, inevitably one of the first topics discussed is that of commingling their funds. What exactly is commingling of funds? When the business owner uses their personal checking account to not only pay for business expenses, but also to accept business payments. For a small, sole proprietor, not separating the funds can be a sign that maybe their business should be a hobby rather than a business, limiting deductions significantly. For all businesses, this damages the layer of protection that your business could have by separating business and personal expenses.

If a business owner purchases something for the business from a personal account, this can have unintended tax consequences. Likewise, if an owner takes funds from the business account, this could create taxable income to the business owner that normally could have been a deduction. Here are some examples of commingling:

  • Transferring money between personal and business accounts, without the proper documentation
  • Using the business card/checkbook for personal expenses
  • Using your personal card/checkbook for business expenses
  • Depositing funds from the business into your personal account

How do you avoid commingling? It’s pretty simple, it just might take you an extra minute or two for some of your transactions. First, you want to make sure you have a separate business account. Second, keeps records (bookkeeping) of all of your business transactions is crucial.

The IRS does not allow the deduction of expenses for items with no documentation. The more documentation and the stronger the paper trail for all of your expenses, the better you are for tax purposes. The less the IRS has to question or wonder whether it is personal or business the more likely it will be allowed, within reason of course.

One last downside to commingling is the lack of a true financial picture you have about how your business is performing. Keeping a profit & loss and cash flow report is crucial to taking your business to the next level. Imagine having many personal expenses mixed in to that. You won’t have a clue what your business really is making and spending.

If you need help organizing and separating your expenses, please allow Bamboo Bookkeeping to help. Remember, we always offer a free hour consultation.