So you used the company card…
Here’s the scene - you are out with your friends for a quick happy hour. When it comes time to pay you realize the only card you have is the credit card for the business you just started. You quickly hand it over to the server and store it in the “I’ll deal with this later” compartment of your brain.
How you handle this next probably depends on your personality and your experience in the corporate world. Maybe you’ll feel immense guilt and fear of repurcussions for commingling funds and handle it as soon as possible. Or maybe you’ll promise yourself to figure it out before tax time, and then go back to the busyness of all the other things happening. Or better yet, you shoot a quick message to your bookkeeper to let them know what’s happened.
Truth be told, this happens to many business owners. It is our job as accountants and bookkeepers to stress the importance of separating personal vs. business transactions. Should your business ever be audited, the goal is to show the IRS that your business transactions are legitimate, reasonable, and necessary for business operations. It is also our job to help you know what to do if commingling occurs.
Here’s a list of actionable steps to take if you’ve mixed personal expenses with business expenses:
Act sooner than later. It’s easy to not act fast when it’s the beginning of the year or mid-summer. The problem is these transactions can be lost in the overall bank data you input and can incorrectly become recorded as a true business expense, leaving your business liable if ever audited.
Tell your bookkeeper/accountant. First and foremost, bookkeepers are not here to make judgment calls on your business handlings. Our goal is to present an accurate and transparent recording of your company’s finances. If you are actively working with a bookkeeper, send them a message to let them know when these instances occur. If the transactions continue to occur, a good bookkeeper may send you a gentle reminder to use caution. The sooner your bookkeeper is aware that you have used your company card for personal use, the more likely they are to ensure all affected transactions are recorded correctly.
Know how to properly record the transaction. If you are doing the books yourself, you will want to make sure you have the right kind of account set up to record the transaction.
The IRS does not see a sole proprietor/single LLC member as a separate entity from the taxpayer. However, it is still good practice to separate personal expenses for an accurate recording of your books and to ensure they do not end up being erroneously recorded as a business expense. Owners should set up an Owner’s Personal Pay/Withdrawal account to track all relevant transactions as they occur.
Multiple-member LLCs and partnerships may have more stringent policies in their partnership or LLC operating agreement terms. Each member/partner should have their own specific Owner/Member Distribution account to ensure transactions are recorded accordingly.
Corporations have the strictest guidelines/adherences to shareholder funds and come with a strong emphasis against commingling. The most accurate way to record such transactions is to not allow them to happen. However, if they do, such transactions should technically be recorded as fringe benefits (or salaries for S-Corps) which are subject to payroll taxes. Another option, shared with a caveat that this is a tax gray area, is to place the transaction into a Loan from Shareholder account and have the individual pay back the amount to the corporation. Such loans should technically be accompanied by a written agreement with accrued interest terms. If the corporation is a S-Corporation it has an additional option to record such transactions into a Shareholder Distributions account. It is important to consult with an accountant should commingling occur.
Regardless of the type of entity, all of these accounts are Balance Sheet accounts and should not affect, or be recorded on, your company’s Profit/Loss Statement as a business expense.
For business owners who have accidentally, or even intentionally, commingled their funds, the best piece of advice is to stop letting it be a common practice in your business. This topic can be more complex than what’s covered in the bulleted points here. Work with an experienced bookkeeper or accountant to ensure such transactions are accurately recorded and systems are in place to avoid future occurrences.
This blog post is for informational purposes only and should not be considered accounting, consulting, or financial tax advice. Individual scenarios are unique and individuals should consult with appropriate professionals. UpKeeping, LLC has no liability for action taken upon reliance of shared information.
by: Erin Pohan
