Start-up business owners sometimes make the mistake of mixing business and personal finances.
Even for the smallest and newest of businesses, it is essential for entrepreneurs to treat their business as a distinct and separate entity.
For one thing, when entrepreneurs mingle personal and business finances, the Internal Revenue Service often concludes that the business is really a hobby, which prevents the entrepreneur from taking legitimate business expenses as deductions to business income.
Intermingling expenses also can make it very hard to determine what the profit and profit margins are, if the entrepreneur has to feed the business more capital and if the business is ready to expand.
There is also the issue of a home office. Without a strict segregation of business and personal expenses, it will be very difficult to prove to the IRS that deductions for a home office are justified. The law requires that a home office be used exclusively for business; not being able to distinguish personal from business expenses will seriously undercut that justification.
Making certain that business and personal expenses are kept apart involves several steps:
• Maintain separate checking and money market accounts for the business, even if it doesn’t have any revenue.
• If using bookkeeping software, set up different files for personal and business expenses.
• Get a business credit card and use it strictly for business.
• Give the business an appropriate corporate structure, which could be a limited liability corporation, a partnership, an S corporation or a C corporation.
Besides making it easier to keep books and report taxes, these steps will establish with the IRS that it’s a business and not a hobby and that any home office deductions are legitimate.
— Herb Wolfson, Wittlin, Simon & Newman, firstname.lastname@example.org.
Business workshop is a weekly feature from local experts offering tidbits on matters affecting business. To contribute, contact Business Editor Brian Hyslop at email@example.com.