How to Avoid the Consequences of Commingling
What is Commingling?
According to Investopedia, commingling refers to “the illegal act of combining client money with personal money without contractual permission to do so”. By mixing personal and business funds, this action could lead to unfortunate consequences, such as letting the business go. Here are a couple of examples of commingling:
Paying for a personal vehicle on the company credit card
Paying for student loans using the business account
Planning a vacation on a business credit card
These situations are all considered commingling and bad practices that no business leader should get into if they want to keep their business up and running.
What Are the Consequences?
So, the risks at play here are never-ending. But before talking about the top reasons - keep in mind the question: “how will it affect my business?”.
Difficult to determine/keep track of business performance
Company owners who have commingled their money may not know if their
business is making a profit or a loss (CaminoFinancial). This will be an issue if no
one pays close attention and will eventually lead to losing the company if the
decrease in revenue goes unnoticed.
Waste time and mix up potential deductions when separating expenses
According to Camino Financial, company owners can save a significant amount in
taxes by deducting business expenses allowed by the IRS. However, if you use the
same bank account for both business and personal expenses, there's a possibility of
facing difficulties when it's time to file tax returns.
Increased scrutiny at the time of an IRS audit
Commingling results in lower margins and bad financials. So, if you do happen to go on vacation
using the business money, the IRS requires that majority of the time spent on that vacation
should be spent doing business. So let's say we're going to Hawaii (or wherever) for ten days, at
least six of those days need to be spent on business meetings or other business adventures. So, if
the IRS does decide to audit the accounts and figures out that the funds were commingled, this
could lead to complications and increased scrutiny (Camino Financial).
How to Avoid the Risks of Commingling?
Honestly speaking, there’s really no harm in setting boundaries between business and personal finances - actually it will many times benefit, especially when avoiding commingling funds.
Open a business bank account/credit card
It's really not that hard or time-
consuming to just create a business card these days. So, just do it as a precaution and for the sake
of future confusion and anything that comes along with the ever-changing financial system.
Consider getting professional help
It's also completely understandable if this seems all too much. Keeping track of
financials personally and business-wise is very important. Not only that - it is also a
lot of work. Here's a quick blog for further reasons to hire a professional to take
care of the accounting so there's more time to focus on the business. With that all
said, get a professional to help so there's no stress that goes toward cash flow
management and filing taxes alone.
Here's a video wrapping up the concept of commingling and how it's the mistake that is costing business owner's money:
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