January 24, 2020Share:
As the business owner, it may be easy to justify paying your personal expenses out of your business account. It can certainly be more convenient to have the business foot the bill for your mortgage, groceries, etc because that is where the money is made. However, there are many reasons why this is a bad idea!
1. Accounting for expenses becomes more time consuming. Each expense has to be reviewed to determine if it should be classified as a business expense or a personal expense.
2. Personal expenses could be incorrectly deducted for tax purposes which can lead to more serious problems with the IRS.
3. IRS audits are more difficult since there are more transactions for the auditor to review. Even if you keep stellar books, there will be extra scrutiny of your expenses to make sure they are proper tax deductions.
4. Comingled funds make budgeting and cash flow forecasting more difficult. Both of these tools are important to grow your business!
But you should enjoy the fruits of your labor! The key is to take the money out of the business the proper way to avoid these issues:
• Own an S Corporation – you should pay yourself a salary that covers the amount needed for your personal expenses
• Operate as a sole proprietor or a partnership -you should take scheduled owner withdrawals