Should you separate your business and personal bank accounts?
A very common question that comes up, particularly with new small businesses, is whether you should separate your business bank account from your personal bank account. The general rule of thumb is that you should not comingle your bank accounts and here is why.
It prevents you from using the business funds for a personal expense.
If you have one business and personal account, you may accidently use business funds for a personal expense or emergency. It is much easier to keep track of everything if you have separate bank accounts. Additionally, the IRS will consider personal expenses paid from the business bank account as compensation.
It prevents you from using personal funds for business needs.
There may be a time when you may have to dip into your personal savings for your business, especially if your business is new and not yet profitable. Over time, your business should be able to pay for itself except during emergencies. Keeping your personal money in a separate account prevents your business from eating up your personal savings.
Most importantly, it simplifies tax preparation or if you are audited.
If you have your personal and business accounts together, it makes tax preparation twice as difficult and makes an audit much more complicated. An audit is when the IRS or another taxing agency comes in and looks at the taxes related to your business or personal account.
Why Should You Be Concerned About an Audit?
There are several reasons that you or your business may be audited. Most commonly, the IRS suspects that the tax return is not correct based off of industry standards. Another reason could be that you have a new business and you made a lot more (or less) income that projected. Lastly, it could just be your lucky day and you were randomly selected.
Most businesses are audited several times during their lifespan, and because of that, you want to be able to take care of an audit easily. You do not want to be sitting there with all of your bank records and dividing your business finances from your personal finances during tax preparation time or audit time. If you have separate bank accounts, you can print out everything related to your business account and be able to hand it to the IRS when they request additional information.
The other problem that may come along is that the IRS may be suspicious about just what is going on with your bank account if you have a combined account. You could end up looking like you are laundering money or being dishonest about your income, just because you made errors, or the IRS looked at your account and could not make sense of it. When all is said and done, it is about making things simpler on yourself. Book a free 20 minute consultation and allow our expert team to help you succeed.