There are many mistakes that business owners can make. This can come in the form of poor operations management (job costing, ordering the incorrect amount of inventory) or incorrect judgment calls (hiring the wrong person for the job). While these mistakes can lead to unwanted business performance and weak financial statements, there is one mistake that is very common but also very preventable, all it takes is a bit of self-control. The mistake I am talking about is using your business accounts, such as your bank accounts and credit cards, to pay for personal expenses.
While using your business to pay for personal expenses isn’t illegal, this practice is not recommended for many various reasons. It may seem like this isn’t consequential, especially if you reimburse the business for these expenses but that is not true.
Loss of tax deductions
Many businesses are audited, this can be random or can come from a mistake made with previous tax filings. If your business is audited and the auditor sees personal expenses mixed in with business expenses then this can lead to adjustments made to your tax returns.
These adjustments could disallow previous business deductions and can lead to an increase in previous years’ taxes. The tax agency responsible for the audit can also impose fines and penalties and can monitor your business more closely in the future.
Loss of corporate protections
If you run a business and form a corporation or an LLC then you won’t be held personally liable for any debts or lawsuits that the business may face. This is a major appeal to business owners. However, if an audit potentially finds that the business runs too many personal expenses through the company could lose their corporate protections. This is also known as ‘piercing the corporate veil.’ This could then lead to the business owner(s) having their personal assets be subject to debt payments if business creditors come looking for payment.
Accounting becomes more difficult
When preparing the books for your business, it can be difficult to remember everything that happened in a specific period of time. This can be especially true if you use the same vendor (ie. Amazon, Walmart, Home Depot) for both business and personal transactions. So when it comes to correctly categorizing your transactions you can incorrectly book some personal transactions as business transactions. Doing this can then lead to untrustworthy financials and ultimately lead to consequences that were previously mentioned. This can be an even tougher task when the bookkeeping isn't handled in-house and is outsourced to a CPA or an accounting firm that does not know everything about your day-to-day operations as well as the business owner does.
How to best move forward
These things happen to businesses every day. If this is something you know you struggle with then it is best to correct this now before consequences arise and it is too late to take action. There are many things you can do to protect yourself, such as opening personal credit cards and bank accounts, learning how to properly withdraw money from your business accounts, and keeping access to business funds to trusted individuals. Talking to a professional accountant about these matters can always be a helpful starting point, they can give you ideas on how to pay yourself as a business owner and offer helpful suggestions on how to best protect yourself and your business.
HOW SCHWARTZ IS HELPING SOUTH JERSEY SMALL BUSINESS OWNERS
Navigating these legal changes and what it means for your small business in New Jersey can be one of the biggest challenges you face in the coming years. Fortunately, Schwartz & Associates is already familiar with relevant tax laws and regulations you need to comply with, including the impact of the Biden Administration's new tax proposals. The American Families Plan (AFP) and American Jobs Plan (AJP) will bring with them new taxes on businesses in the coming year, and Schwartz is prepared to ensure your South Jersey business is not only in compliance but maximizing its benefits.
Contact us for more insight into what these changes may mean for your business specifically and what we can do to ensure you're getting the most out of your deductions.