Accounting and Budgeting

RE: Divide and Conquer

AFBBIZ — Fri, 18 Apr 2008 00:15:09 GMT

Although the proprietor and corporation are distinct as business entities, the IRS does not permit either to get off the hook when it comes to maintaining proper accounting. Corporations can also get in a whole lot of trouble for mingling personal and business expenses. That is referred to as piercing the corporate veil. That could cause the IRS to take away the corporation or fine it for doing so deliberately. Therefore, when it comes to tax time, proper accounting for any business entity makes it much easier to complete the 1120, 1120s, or 1040(C) (for the proprietor). In examining the return, the IRS may take a close look at those miscellaneous expenses and send out an examination letter asking for support. Therefore, it is good business practice to have a separate business credit card and chacking account. Those credit card expenses must capture business expenses only or be liable to IRS scrutiny.

The article was good in highlighting some pertinent basic principles. I thought I would add a few more.

AFBBIZ

RE: Divide and Conquer

UniqueArt — Wed, 07 Nov 2007 18:14:28 GMT

This is a very good article. Make sure to pay yourself first with a personal checking account, that way you will not use the business account for personal transactions.

RE: Divide and Conquer

LT Lawn Care — Fri, 19 Oct 2007 22:46:13 GMT

Great article - this is one of the reasons my first year in business was so tough. I used a personal checking account for my household bills and my business. My accounting was terrible and doing taxes was a nightmare. Take the writers advice and seperate the two.

RE: Divide and Conquer

Lighthouse24 — Thu, 18 Oct 2007 06:16:50 GMT

Good article with many important points. It might have included a couple of real life examples or testimonials to really drive those points home (for instance, in one of the forum posts, a contributor tells of how the IRS looked at the hard drive of his home-based business computer to be sure it was business only).

RE: Divide and Conquer

MDTaxCPA — Thu, 11 Oct 2007 08:49:51 GMT

Great Article! It's like you took the words right out of my mouth.

I often have this exact conversation with many of my small business owner clients. In fact I have been on several audits (and BTW you are right they are no fun) and again you are correct about the home office deduction. They key in more on the exclusive use test (home office must be used exclusively for your business activity) vs. the regular use test in an effort to uncover an improper home office deduction. I once had an auditor try to disallow an entire business loss deduction because the owner's "profit motive" was in question as a direct result of the comingling of business and personal activities.

I urge everyone to try and keep the business and personal activities clearly separated as much as possible.

RE: Divide and Conquer

akgold — Wed, 10 Oct 2007 16:48:29 GMT

I think this article states some really good basic points. In the end, you want to have clear records. When I was a Schedule C, things were a lot blurier where my personal and business expenses were mixed together and I would mark up my credit card statements with a different marker for business expenses.

Having a C Corporation makes it much different and this forces you to use your business accounts separately and business credit cards separately too. I think when you are smaller you do what works but as you grow having a clear division is much easier.