ne of the most common bookkeeping mistakes business owners make is mixing business and personal finances. Addressing this issue before year end can simplify tax preparation, improve the accuracy of your financial records and help reduce the risk of IRS questions.
Build a strong foundation
Business expenses generally must be "ordinary and necessary" to qualify for a tax deduction. If personal purchases are recorded as business expenses, you could overstate deductions. On the other hand, if legitimate business expenses are paid with personal funds but never recorded, you could miss valuable deductions.
Mixing business and personal transactions also can distort your financial statements, making it harder to measure profitability, manage cash flow and make informed business decisions. For corporations and limited liability companies, maintaining separate finances helps reinforce the legal distinction between the business and its owners.
Use this checklist to help ensure your records are complete and accurate:
- Review business bank and credit card statements to identify personal transactions that should be reclassified.
- Record legitimate business expenses paid personally by owners or employees, and ensure reimbursements are handled properly.
- Verify that owner draws, capital contributions and shareholder or partner distributions have been recorded in the correct accounts rather than as business expenses.
- Gather receipts, invoices and other supporting documentation and confirm that your records are complete and organized.
Seeking guidance
Accurate books make tax season easier. Turn to us for guidance.