For home and start-up businesses, it’s just easier to keep all of the finances in one bank account. You might even think that since you keep two sets of books that separate out your business and personal finances that you’ll be in the clear.
Unfortunately, you would be wrong. While incorporated businesses must keep separate accounts, even small home businesses run out of the basement should have a business checking account to handle their financial transactions. If you’re not careful, you’ll soon be attracting an audit from the IRS.
There’s a lot of speculation as to how the IRS decides who it will audit each year. But one great way to find yourself risking an audit is by failing to keep good business records, failing to keep your accounts separate, and failing to leave a paper trail.
Failing to Keep Good Business Records
Business records show what you have been doing with your time and your money. The IRS wants you to show a profit three years out of every five. Yes, you probably know that form. Federal Tax Form Schedule C if you fill out your own taxes.
If you aren’t making a profit, then you need to show other factors through your records that you are running an actual business and not just a hobby business. The standard according to the IRS is that you are involved in “an activity with continuity and regularity, and for the primary purpose of pursuing profit.” It is a factor-based test. Profit, fortunately, is not the only factor.
The factors considered are:
Failing to Keep Your Accounts Separate
One of the keys to carrying out business professionally is through keeping a separate business account. Even though you may keep excellent records, you are shooting yourself in the foot if you keep your personal checking account and business checking account together. If you are incorporated, you may even lose your status as a corporation, and that means that your creditors can pierce the corporate veil and sue you personally for what your business owes.
It’s not enough for you to have two separate books or records. The money must be physically separate. It must be in a completely different account, and you must only use it for business. Not only will keeping your business account separate from your personal finances make your life easier as a business owner, but it will also make it far simpler to show your track record and leave a paper trail.
Failing to Leave a Paper Trail
The paper trail is more than just keeping a separate account and keeping good records. It includes all this plus copies of all your transactions, whether virtual or physical. You need to keep these documents along with your filed tax returns for at least six years. Keeping them longer won’t hurt you, and the IRS does advise that you never get rid of your tax returns should you have ever filed a fraudulent one.
Your paper trail can be scanned into a computer system. But if you do that, make sure that you keep it backed up. Otherwise, you could be without any returns at all.
Establishing the Best Business Checking Account for You
One of the easiest and simplest ways to keep the IRS away is to maintain a separate business account. It makes it easier keep good clean records and an accurate paper trail because you aren’t trying to juggle between paying the house mortgage and paying your business’ electric bill. Not only that, but in the event that you are audited, since some audits happen at random, the entire process will be far easier than if you had not done anything of these things.
So now, if you don’t have a business checking account, let me share a couple tips on how to get the best deal for opening one.