One of the most common accounting mistakes small business owners make is mixing their business and personal finances. Rather than using two separate accounts — an account for their business finances and another account for their personal finances — they use a single account. They’ll use this single account to receive money from their business’s customers, and they’ll also use this account to pay for both business- and personal-related expenses. While mixing business and personal finances may sound harmless, it can lead to several problems.
Missed Tax Deductions
Mixing personal and business finances can result in missed tax deductions. As you may know, most business-related purchases can be deducted from your taxes. Whether it’s cleaning supplies, shipping services, insurance, inventory, etc., you can typically deduct them from your taxes. You’ll need to identify them, however. And with mixed personal and business finances, you may overlook some of these tax deductions. The end result is a higher tax liability that cuts into your business’s annual profits.
Increased Risk of Tax Audit
Speaking of taxes, mixing personal and business finances can increase the risk of a tax audit. The Internal Revenue Service (IRS) doesn’t explicitly prohibit business owners from mixing their business and personal finances. It does, however, require them to maintain complete accounting records. Mixing business and personal finances can make it difficult to create complete accounting records. All of your business-related transactions will be tied to the same account as your personal transactions. The end result is messy and incomplete accounting records that place you at a greater risk of a tax audit.
Unprofessional Brand Image
Another reason to avoid mixing personal and business finances is that it creates an unprofessional brand image. You may need to write checks on behalf of your business. Maybe you’re purchasing inventory from a supplier, or perhaps you’re refunding a client or customer. Regardless, if you mix your personal and business finances, you’ll have to write checks from your personal account, which will also be used for your business-related transactions. The supplier, client or customer will see your personal name on the check rather than the name of your business.
The bottom line is that you should use separate accounts for your business and personal finances. Mixing these finances together under a single account can lead to missed tax deductions, an increased risk of a tax audit and an unprofessional brand image.
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