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The Importance of Separating Your Business and Personal Expenditures

Posted Apr 28, 2015

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As a business owner, it seems as though there aren’t enough hours in the day.  As a result, it makes perfect sense to take shortcuts when you can find them.  For example, you are paying business bills…it’s late, you’re tired, and you realize that your home mortgage is due. So you pay it using the business checking account.  Another example is using the business credit card to pay for personal expenses, like trips to the grocery store or filling up your vehicle with fuel.  You tell yourself that it is ok as long as you don’t call the charges business expenses.

If these situations sound familiar, you are not alone.  However, it is important to create a boundary between your business and personal finances.  Business income and expenses should flow through a separate business bank account.  Personal income and expenses should flow through a personal bank account.

Why does this matter?

One big reason to separate business and personal finances is to make it easier to file accurate tax returns…and substantiate business expenses if you’re ever audited.  And if you have difficulty deciphering what is business and personal in a combined account during audit, just imagine what the IRS would think. Running personal expenses through a business account (or business expenses through a personal account) increases the risk of inaccurate filings, unfavorable audit findings, and subsequently, penalties.

In addition, separate business finances means less work for your CPA. And less work for your CPA means a lower bill for you!

Lastly, separating business from personal finances is a critical first step in establishing the business credit that you may need to grow and develop your business in the future.

If you have any questions or would like to know how HBL can assist you with your business needs, please contact us here.

Additional Resources:

https://www.sba.gov/blogs/why-and-how-keep-your-business-and-personal-banking-separate

http://www.experian.com/small-business/small-business-credit.jsp

 

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As a general disclaimer, the information provided above is very general and broad in nature, is not represented as complete, and may not apply to taxpayers’ individual situations. We advise all taxpayers to consult a professional tax advisor regarding their own specific tax needs. 





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