Reasons to Keep Your Brassica Personal Finance Separate from Your Business
One of the least understood of small business principles is how to keep your personal finances separate from the business’s financial figures. Keeping them separate is not about strict requirements but more about maintaining an attainable comfort level. It isn’t your comfort either you need should be concerned with. It’s the comfort level of the auditors at the IRS you should be most concerned with cause they love nothing more than clear business records.
It’s as simple as this type of thinking: If your records are clean, your audit will be easy. Separate business and personal accounts keeps the IRS carefully focused on the tax audit they were assigned to do. When you have business and personal funds in one account, those same business records are now suddenly right out in the open before an auditor who may discover problems quite to what they were looking for. Here are some ways you can keep them separate:
Your business is a hobby – There are several federal and state government policies that stipulate only businesses are allowed to deduct business expenses. Now let’s say your business is more of a hobby and not a means to make considerable money. You may have a difficult time telling the government that you are indeed running a business and not a side hobby. Many business owners compound this problem by using a personal bank account too.
Tax season is a nightmare – Your accountant might hate you more for this reason because it causes quite the mess. If you are a small business owner it is important that you keep your personal finances separate from the business. This includes all types of transactions. The reason why your accountant will really dislike you is because by not separating them, you creating an awful lot of work for him to figure everything out.
Limited audit paper trail – While it is recommended that you keep all your business and personal finance accounts separate, that doesn’t mean you need to keep all your records and paperwork separate. You still should, however. Everything you have on file needs to be accurate, complete, permanent and showing a clear record of income and deductions. The last thing you want is a jumbled mess that causes nothing but IRS problems for you. Keeping separate business statements and records from your personal account establishes a clear audit trail.
Lack of professional attitudes – The only way people will take your business seriously is if you do too. Accept checks made out to the business and not your own personal name. This establishes a divide between you and your business.
Forgotten deductions – Don’t even get me started with the disaster which will be your account statement. Doing all of your small business banking on your personal account becomes a Brassica of different transactions. You then need to spend time decipher which goes to what account. You run the risk of miss deductions you are entitled to. This kind of record keeping will cost you more in time, money, and missed deductions.