It is time to finally put to bed the question – Do I need a separate business checking account?
By now you should know that the answer is a definite yes.
Why should you have a separate checking account for your business? Let me count the ways (in most cases the emphasis is mine) –
* “One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account. The business checkbook is your basic source of information for recording your business expenses. You should deposit all daily receipts in your business checking account. You should check your account for errors by reconciling it.”
IRS Publication 583 (Starting a Business and Keeping Records)
* “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 ‘hobb’”. 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.”
Robert D Flach (“You Do Need A Business Checking Account”)
* “Mr. Flach gets it right. You will save yourself a lot of time at tax time, and a lot of grief in an IRS exam, if personal is personal, business is business, and that's that. Run your business like a business.”
Joe Kristan (“If You Have a Home Business, Should You Have a Business-only Checking Account?” at the ROTH AND COMPANY TAX UPDATE BLOG)
* “Based on 21 years of tax return preparation (and 2 having micro businesses) my experience has taught me...While good documentation of business expenses from a personal account may help in an audit, I would never want to convince an IRS agent that flowers for my mom were a business expense even if they were.
Hobby vs Business classifications are easier if the owner is acting like it is a business and takes on the responsibility of a business account.
It's really cheaper. My business account is free most of the time and even if it wasn't a few bucks a month is much cheaper than paying the tax professional to clean up someone's personal/business account to do taxes. I can't think of a client with a merged account who didn't need me to spend extra time (and charge more) to audit their account for legitimate expenses. If you want to buy the kids' school supplies and copy paper and toner for the business together from one account. Be prepared to pay me to separate them and pro-rate the tax. Much cheaper to separate them and pay for them separately from different accounts.”
Trish McIntire (comment submitted to The Wandering Tax Pro and June Walker’s blog)
* “Whether or not a taxpayer has a separate banking account for a business and/or comingles funds between the business and personal accounts is an issue that has come before the US Tax Court. The court always holds against the tax payer any comingling of funds and/or failure to maintain a separate account. A taxpayer must then prevail on other facts and circumstances to win their case that they are conducting a business. At a minimum, anyone advising a taxpayer to not maintain a separate bank account should also advise them that they stand a greater risk in a tax audit and before the US Tax Court if they fail to maintain the account.”
Hal Leahy (comment submitted to The Wandering Tax Pro – the comment included many examples of Tax Court cases where the taxpayer did not have a separate business checking account)
* “The important thing is to have an account for your business that’s separate from your personal account. The IRS and CRA both recommend keeping all personal and business finances separate. This can be a bookkeeping challenge for many home-based businesses, but the painstaking record keeping will be worth it if the government ever calls on you to justify your business deductions.
The other advantage is that a separate business account may be seen as more professional when you’re dealing with vendors or suppliers. Home-based businesses may not be taken as seriously as conventional businesses, so by showing that you’re running the business professionally, you’re boosting your credibility.”
Yvonne Jeffery & Sheri Linsenbach ("Opening Business Checking Accounts" at EVERYTHING.COM)
* “Keeping things separate also helps you to see if your business is profitable (the major goal of owning your own business, of course).”
Cindy Morus (“Separate Accounts for Business and Personal Expenses” at MEND YOUR MONEY)
* “Here are some additional benefits of setting up a separate business account:
• It becomes very easy to track day-to-day expenses and manage payments from one source
• You can review business finances at a glance, especially if the statements are available online
• You can speed up your tax process; your accountant can easily see the tracking and progress of all of your business payments, and set up the necessary accounts for reporting purposes with ease
• Business checking accounts may offer you reduced fees and processing charges
• You're eliminating potential scrutiny from the IRS regarding personal and business accounting transactions
• You can monitor incoming and outgoing payments easily
• It's easier to match up your expenses on the general ledger and chart of accounts at the end of the fiscal year
• Deposits and receipts are easier to track and store
• It's simple to match invoices and cash receipts
• If you're using online payments for bills or even payroll, the transfer of funds will be instant-you won't have to balance your personal checkbook every time
• You'll have easy access to the paper trail of your business operations
When you can separate the flow of money from your personal accounts, it becomes much easier to identify revenue and expenses with ease.”
Sabah Karimi (“Setting Up A Separate Bank Account for Your Small Business” at HUB PAGES)
“The most important rule in record keeping for the small business is this: Open a separate checking account for your business and use that checkbook as an audit trail to record all business activity! Without a separate business checking account you cannot possibly keep track of your income or expenses and you are asking for an unfavorable audit.”
AccounTax Professional Services, Inc. (“Easy Record Keeping For The Small Business”)
I could go on and on, but you get the idea. With the one exception (you know who), to a person (I do not want to be called sexist by saying “to a man”) every tax blogger and tax and business professional agrees with me and recommends having a separate business checking account for any business activity, including the non-LLC sole proprietor who files a Schedule C.
By now you should know that the answer is a definite yes.
Why should you have a separate checking account for your business? Let me count the ways (in most cases the emphasis is mine) –
* “One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account. The business checkbook is your basic source of information for recording your business expenses. You should deposit all daily receipts in your business checking account. You should check your account for errors by reconciling it.”
IRS Publication 583 (Starting a Business and Keeping Records)
* “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 ‘hobb’”. 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.”
Robert D Flach (“You Do Need A Business Checking Account”)
* “Mr. Flach gets it right. You will save yourself a lot of time at tax time, and a lot of grief in an IRS exam, if personal is personal, business is business, and that's that. Run your business like a business.”
Joe Kristan (“If You Have a Home Business, Should You Have a Business-only Checking Account?” at the ROTH AND COMPANY TAX UPDATE BLOG)
* “Based on 21 years of tax return preparation (and 2 having micro businesses) my experience has taught me...While good documentation of business expenses from a personal account may help in an audit, I would never want to convince an IRS agent that flowers for my mom were a business expense even if they were.
Hobby vs Business classifications are easier if the owner is acting like it is a business and takes on the responsibility of a business account.
It's really cheaper. My business account is free most of the time and even if it wasn't a few bucks a month is much cheaper than paying the tax professional to clean up someone's personal/business account to do taxes. I can't think of a client with a merged account who didn't need me to spend extra time (and charge more) to audit their account for legitimate expenses. If you want to buy the kids' school supplies and copy paper and toner for the business together from one account. Be prepared to pay me to separate them and pro-rate the tax. Much cheaper to separate them and pay for them separately from different accounts.”
Trish McIntire (comment submitted to The Wandering Tax Pro and June Walker’s blog)
* “Whether or not a taxpayer has a separate banking account for a business and/or comingles funds between the business and personal accounts is an issue that has come before the US Tax Court. The court always holds against the tax payer any comingling of funds and/or failure to maintain a separate account. A taxpayer must then prevail on other facts and circumstances to win their case that they are conducting a business. At a minimum, anyone advising a taxpayer to not maintain a separate bank account should also advise them that they stand a greater risk in a tax audit and before the US Tax Court if they fail to maintain the account.”
Hal Leahy (comment submitted to The Wandering Tax Pro – the comment included many examples of Tax Court cases where the taxpayer did not have a separate business checking account)
* “The important thing is to have an account for your business that’s separate from your personal account. The IRS and CRA both recommend keeping all personal and business finances separate. This can be a bookkeeping challenge for many home-based businesses, but the painstaking record keeping will be worth it if the government ever calls on you to justify your business deductions.
The other advantage is that a separate business account may be seen as more professional when you’re dealing with vendors or suppliers. Home-based businesses may not be taken as seriously as conventional businesses, so by showing that you’re running the business professionally, you’re boosting your credibility.”
Yvonne Jeffery & Sheri Linsenbach ("Opening Business Checking Accounts" at EVERYTHING.COM)
* “Keeping things separate also helps you to see if your business is profitable (the major goal of owning your own business, of course).”
Cindy Morus (“Separate Accounts for Business and Personal Expenses” at MEND YOUR MONEY)
* “Here are some additional benefits of setting up a separate business account:
• It becomes very easy to track day-to-day expenses and manage payments from one source
• You can review business finances at a glance, especially if the statements are available online
• You can speed up your tax process; your accountant can easily see the tracking and progress of all of your business payments, and set up the necessary accounts for reporting purposes with ease
• Business checking accounts may offer you reduced fees and processing charges
• You're eliminating potential scrutiny from the IRS regarding personal and business accounting transactions
• You can monitor incoming and outgoing payments easily
• It's easier to match up your expenses on the general ledger and chart of accounts at the end of the fiscal year
• Deposits and receipts are easier to track and store
• It's simple to match invoices and cash receipts
• If you're using online payments for bills or even payroll, the transfer of funds will be instant-you won't have to balance your personal checkbook every time
• You'll have easy access to the paper trail of your business operations
When you can separate the flow of money from your personal accounts, it becomes much easier to identify revenue and expenses with ease.”
Sabah Karimi (“Setting Up A Separate Bank Account for Your Small Business” at HUB PAGES)
“The most important rule in record keeping for the small business is this: Open a separate checking account for your business and use that checkbook as an audit trail to record all business activity! Without a separate business checking account you cannot possibly keep track of your income or expenses and you are asking for an unfavorable audit.”
AccounTax Professional Services, Inc. (“Easy Record Keeping For The Small Business”)
I could go on and on, but you get the idea. With the one exception (you know who), to a person (I do not want to be called sexist by saying “to a man”) every tax blogger and tax and business professional agrees with me and recommends having a separate business checking account for any business activity, including the non-LLC sole proprietor who files a Schedule C.
.
I must point out that when a Schedule C is selected for audit the IRS will obviously want to see the bank statements for both the business and the personal accounts and track the deposits to both. They want to make sure that all business income is properly reported. It is very important to maintain proper documentation for the deposits to both the business and the personal checking accounts.
Even though every reliable source, including the IRS, advises that an independent contractor/sole proprietor should keep a separate business checking account, it is not a strict legal requirement. And it does not mean that every independent contractor/sole proprietor will do so. We can talk until we are blue in the face telling clients what they “should” do, but there are always those who thank us for the advice and do just the opposite.
A small business, especially the smaller and simpler side-line business, can get by using the owner’s personal checking account for business transactions, and many do. In such a case as a tax preparer I can still properly complete the Schedule C and Form 1040, and have done so often in the past, although it may involve more work and a higher fee.
But every time I am asked “do you recommend that I” or “should I” have a separate business checking account I will answer with a definite “yes”!
Even though every reliable source, including the IRS, advises that an independent contractor/sole proprietor should keep a separate business checking account, it is not a strict legal requirement. And it does not mean that every independent contractor/sole proprietor will do so. We can talk until we are blue in the face telling clients what they “should” do, but there are always those who thank us for the advice and do just the opposite.
A small business, especially the smaller and simpler side-line business, can get by using the owner’s personal checking account for business transactions, and many do. In such a case as a tax preparer I can still properly complete the Schedule C and Form 1040, and have done so often in the past, although it may involve more work and a higher fee.
But every time I am asked “do you recommend that I” or “should I” have a separate business checking account I will answer with a definite “yes”!
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