Running personal expenses through your business may not seem like a big deal, but this practice can cause problems you may not have considered. Here are a few reasons why you should keep your personal and business expenses separate.
3 Important Reasons to Stop Running Personal Expenses Through Your Business
1. Rules are rules, and you may be audited.
The IRS does not allow personal expenses to be deducted as business expenses in terms of filing for your taxes, but some business owners will deduct personal expenses as business expenses in their accounting system to reduce their taxable income. If your business is audited and the tax agency finds personal expenses mixed with business expenses, they may adjust your tax returns. This of course, may result in the assessment of additional taxes.
2. Accurate accounting is essential for sound decision making.
When personal expenses are run as business expenses, the accounting of business expenses becomes inflated with those that aren’t actually related to your business. This blurs the financial picture and can grossly reduce your ability to assess the financial health of your business. Accurate financial information is essential to making sound business decisions.
3. If you want to sell, you may have harmed your valuation.
If you decide to sell your business, you will want to obtain a business valuation, and prospective buyers will want to review your financials. If your business expenses have been inflated with personal expenses to reduce your net income (likely in hopes of reducing your taxable income), this will negatively impact the calculated value of your business. Cash flow is highly important in a business valuation, and running personal expenses through your business moves the needle in the wrong direction.
Our experience in buying and selling businesses for more than 25 years has shown that running personal expenses through the business is a habit — or even merely an oversight — that far too many business owners have overlooked and then seen negatively impact the value of their business. These observations are for educational purposes, and your CPA will be your best source for financial advice specific to your situation.
Even if selling is not in the near future for you, take some time to review the following articles about what goes into a business valuation and how today’s accounting practices can impact tomorrow’s valuation.
- Year-End Tax Planning for Business Owners: Are You Undermining Your Goals?
- 5 Important Valuation Concepts Every Business Owner Should Understand
- Why Every Business Owner Needs a Valuation
If you are thinking about selling your business, or if you have questions about the value of your business, we would be happy to talk with you. Contact Viking for a confidential valuation today.