Commingling funds is an inadequate business practice while commingling is common for small businesses and entrepreneurs. This is particularly common for our clients who are in their early stages of business and finance. When you commingle funds, you treat business funds as personal money, whether it is income or expense.
When you commingle funds you establish the potential legal liability of “piercing the corporate veil” which removes the separate liability between your personal assets and business. Legal troubles can put all the incorporation efforts at risk if the court determines that the veil has been pierced. The financial and time investment of forming a L.L.C. or corporation, such as filling the Articles of Organization or paying attorney and filing fees will be rendered meaningless.
When courts examine if the company has “pierced their veil” the first thing they consider is the commingling of funds. When funds are found to be commingled the courts will then hold your personal assets liable. The IRS does not require that you maintain separate bank accounts for your personal and business activities but it is encouraged
Commingling funds is mainly a legal issue not a tax issue.
Common examples of commingling funds that we have seen with our community:
The most important step to take to avoid commingling funds is to create a separate bank account to document all expenses, withdrawals, and deposits. Adequate documentation allows you to maintain better records for taxes.
Maintaining quality accounting standards by keeping separate bank accounts and only using business funds for business expenses will help you observe how your business is performing which leads to better business decisions. It also enables you to keep personal funds separate and creates a personal budget since you will not be conflating business and personal funds.
Personal tax and business tax are treated differently. Your personal expenses may not qualify as a valid business expenses. Of course, the IRS does not allow you to deduct business expenses that you cannot document. When combine the accounts for personal and business expenses it is hard to substantiate you entitled deductions.
Tracking business income and expenses in a segregated business account is crucial to help minimize taxes and maximize deductions. Establishing a separate business account, you allow you to avoid commingling funds and creates a more organized and efficient way to reduce liability and taxes.
In the event, like many investors, agents, and business owners you do not follow best practices and you commingle funds we can retroactively adjust the books to correct mistakes. This is imperative for tax purposes as we will want the books of the business to reflect what we report on the tax return.
In addition, we can also implement an accountable reimbursement plan for corporations. This will provide flexibility when using personal accounts for business expenses. This is common practice for corporations and is discussed in greater detail later in the article.
The benefit of maintaining separate account .......allowing you to segregate and track all income and expenses.
If you are operating as a sole proprietor commingling funds is not a significant liability from a tax or legal perspective. This is because you won’t have an entity’s corporate veil to maintain. The benefit of maintaining separate account for sole proprietors is that the business bank account can serve as your accounting platform allowing you to segregate and track all income and expenses. As you grow, you’ll want to integrate a comprehensive accounting platform but this will be sufficient in the early stages of your business finances.
When you establish a corporation commingling funds and maintaining best practices becomes imperative. If a mistake does occur, we can retroactively fix it. This is common for investors and business owners who are still implementing best practices into the finances side of their business.
C and S Corporation owners face much more serious implications if they commingle funds from a tax, accounting, and legal perspective. If commingling exists and is not dealt with properly and timely, the IRS could disallow deductions.
Many investors and agents use their personal credit cards to pay for expenses because they receive better rewards or because it may be more convenient at the time of purchase. This makes sense an and an occasional purchase generally will not pierce the corporate veil. When you consistently use your personal credit cards for business expenses and establish a pattern you threaten the integrity of your corporate veil.
.....utilizing the personal card for a business expenses is still permitted if an accountable reimbursement plan exists.
It is imperative that a shareholders and employees of corporations establish best practices for segregating personal and business expenses. However, utilizing the personal card for a business expenses is still permitted if an accountable reimbursement plan exists.
An accountable reimbursement plan eliminates the commingling issues for corporations. It allows the owner to use a personal card for business expenses and receive a business write-off for the expense.
The accountable reimbursement plan enables employees of a corporation to be reimbursed for expenses. If a corporation does not implement an accountable reimbursement plan, some business expenses will no longer be deductible by the business. The employee will be required to report the business expenses on Schedule A as an unreimbursed expense. Considering the regulations for Schedule A reporting, the employee will lose the deduction those expenses.
All investors, agents and business owners should implement best practices regarding business account segregation and general accounting practices. Maintaining separate personal and business accounts is the first step to establishing foundational accounting practices for your finances.
Spencer Accounting Group, LLC offers a series of services to develop and tailor a first-rate accounting system for your business needs. If you need an Accountant to help commingling funds, we are the people to call. Reach out to our team regarding any questions about commingling funds or establishing a first-rate accounting system.
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.