Date: September 1, 2022
Stop This Common Mistake or the IRS Will Get You
As a small business owner, utilizing credit cards for business expenses can prove to be a handy tool. It is easy to get in the habit of reaching for your personal credit card, especially when you are busy. Depending on your business structure however, are you aware of the serious implications of charging personal items on your business card? Most business owners aren’t aware of the risk, but there are a few reasons why you should keep business and personal charges separate.
• First of all – it’s best business practice to keep your personal and business expenses separate. Co-mingling puts you at high risk and on the IRS radar for an Audit– it opens you up to becoming personally liable once you ‘pierce the corporate veil’. Essentially piercing the veil means that, according to the courts, the distinction between the business and the owners is taken away, which is why most business owners choose their entity in the first place (such as a LLC, for instance). The most common example of piercing the corporate veil is business owners using a business credit card for personal expenses.
• From an accounting standpoint, it makes tracking business expenses more difficult. This also means your reports will not have clear insight since personal expenses are added in the mix, and it is important to have accurate accounting records. It could also impact your ability to receive business loans. What if you accidentally use your business card for a personal purchase? It happens! Just make sure you notify your accountant so they can classify it accordingly, and make sure to pay that expense off as soon as you are able.
• Don’t let yourself miss out on tax deductions! When it comes time to file your taxes, you’ll want to take advantage of every business tax deduction that you are legally entitled to – since personal expenses aren’t tax deductible, it makes sense that you wouldn’t want to intertwine the two. No one wants to overpay in taxes, so utilizing the deductions can be key to reducing your tax obligation. Having an expert on your side to implement a tax plan is an excellent, proactive approach that happens year round. The tax code is long and confusing, but having an expert on your side to guide you is a huge time saver and stress relief.
• Remember the terms and conditions that you agreed to when you signed up for your business credit card? Many credit car issuers include a disclosure ensuring that you will only use the business credit card for business purchases. You wouldn’t want them to close your account down if they found personal charges on the card.
We love helping small business owners succeed! Everyday, we are helping clients to reduce their tax bill, and ensuring that they utilize best business practices, such as keeping personal and business expenses separate, which helps mitigate stress and save time. If you are looking for someone to handle your monthly accounting, or advise you on the next best steps for your business (such as a tax plan) we would be happy to help, click here to schedule a call with us. We look forward to hearing from you.