By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs
It can happen for a number of reasons, a business owner mixes the funds for their business with their personal finances. Especially during these trying times, it can be easy to let those funds intermingle. But the can of worms this can open is usually not worth the short-term fix this practice can offer. I asked some of the members of our Business Services & Solutions Team at Holbrook & Manter to weigh in on the following prompt: Explain the dangers a business owner faces by mixing personal funds with the funds for their business.
Read their responses and tips below.
When a small business owner comingles their personal funds and their business funds, accounting for the business can be difficult and sloppy. This often leads to business financials incorporating personal expenses or excluding business expenses, which then portrays an inaccurate financial position of the company. When looking at inaccurate financials of the company, small business owners can’t tell which parts of the business are doing well, and not so well, making it difficult to make business decisions. — Natalie Bruns
Not drawing a line between your personal funds and your business funds can indicate a lack of dedication to the success of your business. In order for a business venture to succeed, it needs a solid foundation and strong business plan. One path to building that foundation is to set up records that will clearly track the cash flow, income, and expenses, specific to your business activities. Peppering your records with both personal and business activity simply muddies the water, making things harder to track. While proper bookkeeping can trace a personal expense that flows through the business funds, or a business expense that hits your personal funds, those instances should be the exception to the rule and not an everyday occurrence. Committing to the success of your business is reflected in the professional manner in which you conduct your business activities. Keeping funds separate is definitely a step in the right direction. — Tammy Westbrook
This issue often arises when owners run a small schedule C business. If your expenses run through your personal account, you may have a hard time proving that the activity is an actual business and not a hobby. If you are audited, you may have a hard time convincing them otherwise. — Joee Brandfass
Mixing personal and business funds can cause both accounting and tax problems. The IRS only allows businesses to deduct business expenses on the annual tax return. If your business were to be selected for an audit by the IRS, you will want an accurate set of books to show a clear record of business expenses paid. If you think you can comingle expenses and then clean up the books before year-end, be prepared to spend a lot of time or money to pay your accountant to separate them for you before a tax return can be prepared. — Danielle Cottle
The biggest reason not to mix business and personal funds is the risk of audit from the IRS. If business expenses are paid with a personal account, business owners run the risk of their business being classified as a hobby by the IRS. If you pay personal expenses with a business account, you run the risk that you won’t accurately separate those expenses when you report your income and expenses on your tax return and, if audited, you won’t have a clear audit trail to provide. – Carmen George
If you have questions about how to keep your business and personal funds apart safely, please reach out. I would be happy to help.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com.