In my blog post yesterday, I presented some conflicting expert opinions about whether you can combine your business checking with your personal checking account, or whether you should keep them separate. I believe it depends what type of legal entity you are operating. If you are a sole proprietor, you can probably use your personal checking account for business purposes; if you are any other type of entity, you cannot.
Working Out of One Checking Account
In her blog post "There's No Shortage of Bad Advice Out There," June Walker cites two cases in which business owners are paying for stuff with checks - at the gas station and the grocery. But who uses checks any more? If you are buying groceries for both business and personal use, you can use two cards, or you can separate out the items from the receipt when you get home. If you are using the IRS standard mileage deduction, you don't separate out each gas purchase. You keep a log of mileage for business and do the accounting at the end of the year.
The Key: Keeping Track of Business Expenses
I'll make this as simple as possible: You MUST keep track of all business expenses, in order to claim them as deductions. And all expenses you record as business, must be for a legitimate business purpose. It doesn't matter if you are using one checking account or two; the main thing to remember is those business expenses. With business mileage, as I mentioned above, record business trips in a log book in your car, so you can figure out at the end of the year what percentage of your car use was for business purposes.
Here is what you must do to keep business and personal funds separate (I really hate "MUST's," but in this case, I'll make an exception; this stuff is really important.):
1. Record business income and purchases as they happen. If you don't, you will forget. I do; we all do; it happens all the time. I have a PayPal account that I used for both business and personal expenses; I look at it every month, and record the business expenses, so I don't forget. Six months later, I am not going to remember what a purchase was for. If you deposit a business check in your personal account, make sure you don't forget it was for your business. Keep a copy of the check, or the stub, and put it in your business file.
2. Include the important information about each business transaction - Who it was from/to; when it happened; how much; and for what purpose (that is, which business account does it go into. For example, if you get a check from a customer, write the purpose on the copy you made. If you sell on EBay, print out a list each month from your PayPal account and note any personal purchases. On each item sold, the name of the customer and the date are already there, so all you need to do is record the account.
If you are at the grocery store and you are buying food for your family and also for a business meeting, keep the receipt and mark out the purchases that were for your business; then record the account for charging these purchases.
Justifying Business Expenses
Just to re-state the obvious. The IRS has no interest in your personal expenses. They do have a big interest in your business expenses. Whether you keep one checkbook or two, you have to keep good records of all business transactions, particularly expenses, if you want to claim them as tax deductions at tax time.
Related Articles:
Capturing Information for Business Records
Create a Business Record Keeping and Accounting System
What Business Records Are Needed to Support Tax Deductions