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.