I Accidentally Paid For Business Expenses Using Personal Funds, Now What?

I Accidentally Paid For Business Expenses Using Personal Funds, Now What?

If you have been around here for awhile you will know I am always preaching, always have a separate business bank account. That should always be the case. Whether you run your business as a sole proprietor, LLC, partnership, S Corp, C Corp, if you have a business you should have a separate business bank account.

With that being said, one question we see asked more and more on our Free Facebook Group is what you should do if you accidentally put business expenses on your personal accounts, so that is what we will discuss here.

Why Should I Separate Business and Personal Expenses?

Because otherwise you will go to jail…. just kidding!

  • The last thing you want to do is commingle business and personal items together because…
    • It is easier to miss legitimate tax deductions. When you have everything commingled together it is easy to forget whether certain expenses were business or personal.
    • You may take a business deduction on an item that is personal related which if found in an audit could potentially create uncertainty for all expenses claimed.
    • It is harder to prove business purpose in the event of an audit.
    • Simply put, do not commingle, regardless of how big or small your business is.
  • Need a modern, virtual business bank account? Email us or submit the form below with your business name and email and I will invite you to a modern digital bank designed specifically for small businesses. It is actually one we use internally here too!

Okay, I Accidentally Paid For A Business Expense On My Personal Account. Now What? 

I get it. Sometimes you can be as careful as possible but certain situations arise where you have no option but to pay for something personally or you accidentally use the wrong card. The good thing is, you can still get the deduction.

  • Option 1: Simply Reimburse Yourself
    • Write a check or transfer money from your business account to your personal account for the items you paid for personally. It is as simple as that.
    • In our discussion about accountable plans we discuss items that are business and personal mixed and how we treat those. This would be handled the same way.
  • Option 2: Do A Manual Journal Entry
    • This option may be a little more difficult if you are not experienced in accounting/bookkeeping.
    • Basically you would create a manual journal in your accounting software to report the expense and offset the expense with either an owners contribution or offset to your owner draws that you may have already took.
    • This is a great option if you don’t need the actual funds personally, where you can still get the deduction without using business cash.
    • If you don’t know how to do this, ask your accountant or bookkeeper and they should know how to take care of this for you.
  • Things To Do To Ensure The Business Deduction:
    • As always, keep a receipt for all business related items especially the ones you paid for personally.
    • Document on the receipt the business purpose and details of the deduction (ex: who, what, where, when, how, etc.) – Be as detailed as possible so if it is ever questioned down the road, there is no questions asked.

That is it, pretty simple! Do not over complicate it, just do one of the options mentioned and move on making sure you have everything documented.

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

Why Should I Hire My Kids In My Business?

Why Should I Hire My Kids In My Business?

Hiring your kids is one of the top kept tax saving secrets.

Now when we start this conversation with clients a lot of people cringe and think this is something that the IRS surely would not allow. However, that is not the case. This is actually discussed directly in the tax code. However, it must be done correctly in order for it to be legal.

We have actually had some lengthy conversations on this in our Free Facebook Group so thought it would be a great topic to write on!

What Do I Need To Know About Hiring My Kids In My Business?

Get a business deduction and your kids potentially pay no tax on that income.

  • IRS Website
    • “Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.”
    • Pay your child through a sole prop or partnership, no need to withhold social security, medicare, FUTA, etc if your child is under 18.
  • Benefits
    • You get a business deduction for items you are typically paying personally anyways.
    • You child can claim the standard deduction (up to $12,550) in 2021, so the first $12,550 would be tax fee and then any income above that would be taxed starting in the lowest tax bracket.
    • You are likely paying for your child’s basketball camps, entertainment, technology, etc so why not get a business deduction for these items you are going to pay for anyway?

Great, Now How Do I Do It? 

In order for this to be legal and stand up against the IRS, it must be done correctly! You cannot just pay your kids a set amount out of your business without any backup.

  • The Details
    • Must be age 7+ – This is an age that has been proven in tax court.
    • Must pay a reasonable wage for the type of work they are doing.
    • Track time to record the actual work they are doing to support the deduction.
    • Pay to an account in the child’s name.
    • Prepare a W2 at year-end
    • Have required documentation: job description, employment agreement, hour/task tracking, payment proof, W2, etc. In our Tax Minimization Program we have a full implementation guide with all of these documents. Check that out here!
  • Potential Issues or Planning Opportunities
    • S Corp – If you operate as an S Corp you are not considered a sole prop or partnership so you WOULD need to be withholding social security, medicare, etc from the payments. This would all of course still be considered a business expense, just some additional tax. In our Tax Minimization Program we do have some work arounds for this “problem”.
    • Non Child Family Members – Think grandchildren, nieces, nephews, etc. If you wanted to hire family members in this area they would not be your direct children so the social security and medicare avoidance would not be applicable. Here too there are some potential work arounds that we walk through in our Tax Minimization Program.

As mentioned, this is a tax strategy you do not want to miss out on. What a great opportunity to get a business deduction and have your children potentially pay no taxes on that income.

Now of course you need to make sure you are doing things correctly to cover you in an IRS audit but that is something that can easily be done as we discussed here.

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.