As a business owner, you’ve probably heard before that it’s best to keep your business and personal banking accounts separate. Something about making things simple and keeping the IRS happy (and away from you during audit season), right?
Having everything in your personal account makes sense at first – before it’s really a business and is more of a hobby. It’s easier, simpler, effective and the IRS doesn’t really care, do you they?
In my experience though, business owners wait too long to make the switch and it can cost you and your bottom line come tax season.
- It takes too long to set up a business account
- I can keep it separate in my budget – it’s no big deal
- I’m a sole proprietor so it’s all the same on my taxes anyway
Are all common reasons I hear from people but let me just tell you…
They’re TERRIBLE reasons!
Let me give it to you straight – there are a bunch of reasons to switch but in my humble opinion, these 3 are the most important for you and for the future of your business.
Bookkeeping made simple
You all know I’m a bookkeeping guru so obviously, my most important reason is going to be about your bookkeeping.
But really, the reason for this is simple – bookkeeping is the foundation of a healthy business.
Simply put, if you don’t know what you have, how can you know where you’re going?
If you’re tracking your expenses and your income, making sure that everything is balanced every month (aka bookkeeping), then you’ll have a clear picture of your business. This gets messy when you’re sifting through personal expenses to find your business ones.
Keeping up with your books turns into an hours-long process that you dread doing (and subsequently procrastinate or put off altogether), putting your business in a hazardous position.
But when you can open your account page online, catalog every line into your spreadsheet and click save, your monthly bookkeeping is done and your biz is safe.
Who doesn’t want bookkeeping to be that simple?
Quick and efficient tax returns
Tax season can be a nightmare for business owners with the threats of audits, owing money or being penalized for not paying on time.
Building on my last point, your tax returns don’t have to be difficult (and aren’t) when all your expenses and income are right there in one account. Your books are balanced and pulling those reports for your accountant is as simple as tapping that download button.
But when you have your business expenses mixed up with your personal ones, you’re bound to miss things.
Everyone wants the maximum return for their taxes, right? The best way to make sure you get that maximum return is to include any and all deductions in the form of business expenses. How easy would it be to miss things when you’re looking at pages and pages of expenses as opposed to a dozen or so lines from each month?
I know which I’d choose.
The dreaded audit
We all know audits can (and do) happen. But did you know that the IRS is on the lookout for business owners who have high expenses (and therefore high deductions with big returns)?
Sometimes, these are legitimate.
Only businesses are allowed by law to file those expenses as deductions. The IRS uses specific guidelines to determine whether your business is legit or just a hobby.
Incurring business expenses that are paid through your personal account gives the IRS the impression that your business is nothing but a hobby.
Basically, you’ve got yourself a red flag waving at the IRS saying “pick me!”
No one wants to be audited, but you can make the process very simple (or even potentially avoid it) but ensuring that your business is a legitimate company and not a hobby by registering it with the state and opening a business account.
It may be quicker at the onset to have all your expenses in your personal account.
You might be able to keep all your expenses separate in your personal budget (you budgeting genius you!).
And you may be a sole proprietor who doesn’t have to worry much about the IRS.
In the end, running your business and keeping your books straight is a much simpler, cleaner and stress-free process when you keep your business and personal accounts separate.
Do you have your accounts separate but need some help with your bookkeeping? The bookkeeping system I use for my business is finally here! Check out the course page for the details.