Friday, August 14, 2009

YOU DO NEED A BUSINESS CHECKING ACCOUNT

Fellow tax-blogger June Walker, “Tax Consultant to the Self-Employed” and author of the book “Self-Employed Tax Solutions” says in her post “You Do Not Need A Business Checking Account” – “You need only one checking account. Do not open a separate checking account for your business.”

June admits that “most accountants disagree strongly with my position”. I am one of those accountants who says that you should definitely open a separate checking account for your business.

We accountants are not alone. As June points out - “In an IRS publication, you are urged to open a business checking account”.

I do agree with her in that a separate business checking account is not a strict requirement. June says, correctly so, “As long as your records are accurate one checking account is perfectly acceptable to the IRS.” Though it is not a strict requirement it is still a good idea.

In my Special Report “So You Want To Be An LLC” I advise sole proprietors who have registered as a “Limited Liability Company” how to operate their business. The same advice applies to a Schedule C sole proprietorship that is not an LLC. Here is what I advise regarding a business checking account -

Open a separate checking account in the name of the LLC {or business}. Deposit all business income to this account and pay all business expenses from it. Avoid using your personal checkbook for business activity and try not to pay personal bills from the business account. If the balance in the LLC account is low, you can “loan” money to the business. Reimburse yourself for cash payments, automobile use and home office use, and pay yourself a “drawings” by writing a check from the LLC {or business} account.”

With the IRS appearance and perception is very important. You want to do as much as possible to give your self-employment activity the appearance of a real business entity so that the IRS does not come back and say that it is really a “hobby”. Keeping your personal and business activity as separate as possible is one way to do this.

The IRS will be taking a closer look at Schedule C businesses in the coming years, especially those that report losses, as part of its war on the “Tax Gap”. The more you can do to appear to operate in a business-like manner the better.

June does make an excellent point - “Many people like to believe that because something is paid by a business check that makes it a business deduction. Of course, that is not so!” The rules for deducting an item applies regardless of from which account the payment is made. A legitimate business expense paid through a personal checking account is fully deductible, while a personal expense paid with a business account check is not.

TTFN

2 comments:

Bruce said...

I like to advise to my clients that yes you should open a checking account in the name of the business.

Sole proprietor or beyond.

I do this not because it is a requirement but usually it helps to insure to me and the client that their business records are closer to accurate than if only using a personal account.

I have had on several occasions where a client was able to quickly and accurately locate an amount because they had a separate account.

It may not be a requirement, but it should be.

Dan Mente said...

Is it illegal to continuously write personal checks from your business account? I know someone doing this and I get the impression she is doing this to hide the profit.