Keep things separate to run a better business - Finance - column - Tutorial

Home Office Computing, March, 1992 by Linda Stern

Your business and personal finances are the church and state of your own system: They aren't always kept apart completely, and it isn't even so awful when they occasionally come together. But everyone is so much more comfortable when the separation is maintained.

In fact, much of what you've heard and will hear about keeping business and personal finances separate is less about hard and fast requirements than it is about comfort levels. Internal Revenue Service auditors are more comfortable with clearly delineated business records. Your spouse might be more comfortable without your fax machine showing up on the family Visa bill. You'll be more comfortable sending suppliers checks that don't have pictures of seashells or you family crest on them.

THE MYTH OF SEPARATE CHECKBOOKS

The conventional wisdom is that you should keep a separate business checking account, but there isn't any rule that says you have to. I have a friend who has two completely separate businesses--she is a social worker who sees private clients and a part-time real estate agent as well. And she runs both businesses through her personal checking account, taking care only to record her business expenses and keep receipts and income records.

However, you must have a business checking account if your business is organized as a corporation or partnership. Or, if your business has a name other than your first and last names, your bank will balk at cashing checks to the XYZ Company through your personal checking account.

But if you have a careful method of tracking your business income and expenses that is separate from your checkbook, and you are a small, one-person "Schedule C" business, you can get away with not keeping a separate checking account.

Business checking accounts can be expensive. A ledger-style business checkbook can run upward of $75, and virtually every bank charges monthly and/or per-check fees for business accounts that start at $10 a month. In addition, you sometimes need to deposit $1,000 or more just to open a business checking account--and you need to maintain a high balance as well.

BIG BENEFITS, THOUGH

That isn't to say that the advantages of keeping a separate business checking account aren't substantial.

A separate business checking account are keep an IRS auditor from going on a fishing expedition by keeping a tax audit carefully focused, notes Douglas Perreault, a Tampabased certified public accountant. Say, for example, that you get audited for your medical expenses, and the IRS asks to see your checkbook. If you've commingled business and personal funds in that same account, your business records are suddenly spread before an auditor who may discover problems quite unrelated to health care while he's browsing.

The cleaner your records, the easier an audit will be. If you write a $50 check for postage just before Christmas on your personal checking account, an auditor might question your claiming it as a business deduction. That same check, drawn at the same time from your business account, would be less to raise eyebrows.

RUNNING YOUR BUSINESS CHECKBOOK

The logical extension of that thought is to pay for every questionable borderline expense from your business checking account so you could write it off, but that is not a good idea, Perreault says. First, because it is unethical to take business deductions for personal expenses. Second, because it is also illegal, and there is no guarantee that the business check you wrote to the Office Supply Company for the pencils, notebook paper, and day-glow glue you bought in September for your kids will be accepted by the IRS. Third, because if you mix personal expenses with business ones, you can cause accounting problems for yourself.

For example, you will not know exactly how much your business is earning and spending. And you will be reducing your income artificially, which may reduce your income taxes now but which will also reduce your allowable retirement contributions, Social Security benefits, and chances for getting a business loan or home mortgage in the future.

Keep your business checking account clear of unrelated income as well. If you need to fund your business with cash from your personal account, always do it by depositing a check that you can show in an audit. If a relative gives you a financial gift for Christmas, deposit it in your personal account and then write a check to your business account. Otherwise, an auditor might view those deposits as undeclared income, the cardinal sin of the income tax world.

If you have a home office, Perreault recommends that you pay shared expenses, like utility bills, out of your business account, so that you don't lose track of any of them. At tax time, you will only be able to deduct a prorated share of those expenses, but you will be sure of having all of them at hand.

HOME OFFICE: A SEPARATION MUST

You absolutely, positively must keep your personal records and effects separate from your home office if you want to take the home-office deduction. The IRS has been extremely strict about this in the past, although Perreault says he sees some signs of a little relaxation. "It used to be that if the home auditor saw that you threw out a Publisher's Clearinghouse junk letter in your office wastebasket, you could lose your deduction," he notes.