accountabilitybusiness expensescomminglepersonal expensesreceipts

Jingle Jingle Don’t Commingle or Santa will put You on the Naughty List!

Naughty, ListYou’re out doing a little Christmas shopping on your way home and realize you left your personal credit card at home.  So you whip out your business credit card to pay for your kid’s new toy.  What’s the harm right?   Well according to the IRS this is a big no no.

What is Commingling?  Simply put, it’s paying for personal expenses through your business.   One of the keys to operating a business is separating your business transactions from personal transactions.  From a legal perspective, most business owners form an entity, like an LLC or a corporation, for holding their business interest and to offer legal protection.  To maintain this protection, care should be taken not to commingle funds and activities from your personal life into the business.

Now we’ve all grabbed the wrong credit card at the grocery store, or forgot the personal card but some business owners make a habit out of it and that is when you get into trouble and are put on Santa’s naughty list.  If you carry a balance on a credit card that combines business and personal transactions, you will not be able to deduct any interest on that card since it is not possible to allocate the business and personal balance.

And now that everyone is working from home, there’s a misconception that you can pay for your home expenses from your business account and claim it as home office expense.  I’ve seen people pay their home utilities, their cable bill, and even their property taxes out of business accounts.   The IRS has rules that you need to follow to get your home office deduction, and this is definitely not one of them.

Some other most common ways to commingle are:

1.  Transferring money between business and personal accounts without any documentation
2.  Writing business checks for personal expenses or vise versa
3.  Using a business credit card to pay for personal expenses, or vise versa
4.   Having only one bank account for personal and business needs.
5.  Withdrawing money from your business account to pay personal expenses without documentation
If you were audited by the IRS, this would probably cause them to dig deeper into transactions to verify their status of business expenses and could result in increased taxes and penalties for you.  The IRS does not allow you to deduct business expenses that you cannot document.  If there is a blurry line between business and personal expenses, it will be harder to explain your business expenses.  If you are running your business too much like a sole proprietorship by paying for personal expenses out of the business account the IRS  can actually  “pierce the corporate veil” , meaning treat you like a sole proprietorship and assess all the taxes, penalties and interest that go along with it!

How to Stay on Santa’s Good Side

If funds are needed for personal expenses, you should transfer money from your business account to your personal account and then pay the expenses from your personal account. Yeah it’s a hassle, but the extra seconds it take you to do it the right way will keep you on the Nice List.  If using credit cards, use a dedicated card for 100% business expenses.