Commingling personal expenses and business expenses is a bad idea for multiple reasons. A prudent business owner needs keep the expenses separate and it is important to understand that even if you are the only owner of your business, you need to keep personal expenses out of the business. There are three main reasons to keep these expenses separate.
The first reason to keep them separate is the cost of accounting and bookkeeping. If the expenses are mixed, it will take more time to properly prepare the accounting and make sure that a personal expense is not accidentally deducted as a business expense or a legitimate business expense is not believed to be a personal expense and left off the tax return as a deduction.
“Piercing the corporate veil”. If having your “veil pierced” sounds like a bad thing, that’s because it is. All that work you did to form an LLC or corporation–filling out Articles of Organization, paying filing fees to your state, drafting an Operating Agreement–will be for nothing as far as protecting your assets from creditors if your veil is pierced.
There are several factors that courts look at when deciding whether to pierce your company’s veil and hold you personally liable on company debts and lawsuits. One important factor is the presence of commingled funds. If you treat your business’s money the same as your own, then you risk the exposure of your personal assets.
The final reason to keep these expenses separate is the IRS. In any audit commingling assets tells the IRS that the accounting is sloppy and disorderly. When they see disorderly books they look further and press harder. If the personal expense was treated as a business deduction, then the IRS will adjust the tax return and add income and tax. In addition to more tax, there will be penalties and interest. However, even if the personal expense is caught and not deducted on the tax return, the existence of it will send a negative message to the auditor. It will create suspicion and when they are suspicious, they look at more aspects of your business, ask more questions and dig deeper. When they see orderly books that are organized, well documented and clean, they tend to back off.
Make sure you maintain an orderly, clean set of corporate books and leave the personal expenses out. Doing so will keep costs down and serve you well in the event of a lawsuit or an audit.