Have you ever found yourself using your personal credit card for business expenses? Or maybe you’ve accidentally paid for a personal expense from your business account? Trust us, you’re not alone! In this episode, host and CEO of Kickstart Accounting, Inc., Danielle Hayden, breaks down why it’s crucial to keep your business and personal finances separate and the steps you can take to make sure it’s all sorted (even if things have gotten a little mixed up already).
Danielle dives into the often-overlooked consequences of commingling funds, which can impact your legal protections, make bookkeeping messy, and even increase your risk of an IRS audit. But don’t worry! We’re here to help you understand the risks and, most importantly, what to do if you’ve already blurred those lines a bit with practical steps you can implement now.
Key Takeaways:
- Legal & Financial Protection: Danielle explains how mixing funds can “pierce the corporate veil,” leaving personal assets exposed in case of legal claims. Keeping accounts separate ensures you maintain your business’s legal integrity.
- Impact on Business Health: When you blend personal and business expenses, it becomes nearly impossible to get a true read on your financial health. Separating expenses helps you pinpoint what’s working in your business, what isn’t, and whether cash flow issues are related to personal or business spending.
- IRS Risks & Tax Deductions: Discover why commingling could increase your chances of an audit and how clean financial records can help you maximize deductions and minimize stress.
- Action Steps if You’ve Already Commingled: Danielle walks through actionable steps to sort it all out, from categorizing personal expenses as owner’s draws to creating an accountable reimbursement plan.
- Regularly Reviewing Credit Cards: Thinking about rewards? Danielle shares why it’s worth finding a business card with perks you love, so you won’t feel tempted to use your personal card.
- Get Help When You Need It: If managing finances alone feels overwhelming, Danielle invites you to connect with her team at Kickstart Accounting for reliable, ongoing support to keep your finances in check.
Topics Discussed:
Examples and Risks of Commingling (00:00:28 - 00:02:20)
Impact on Business Health (00:02:46 - 00:04:03)
Cash Flow and Commingling (00:04:03 - 00:05:01)
Challenges in Tax Deductions and IRS Risks (00:05:01 - 00:06:25)
What to Do if You Have Already Commingled (00:06:25 - 00:07:34)
Action Steps for Business Owners (00:08:04 - 00:11:12)
Wrap-Up – Importance of Recording All Business Expenses Properly (00:11:12 - 00:12:03)
Resources:
Free Guides | https://kickstartaccountinginc.com/gift/
How to Pay Yourself as a Business Owner
6 Tax Tips Every Business Owner Should Know
Book a Call with Kickstart Accounting, Inc.:
https://kickstartaccountinginc.com/book
Connect with Kickstart Accounting, Inc.:
Instagram | https://www.instagram.com/Kickstartaccounting
YouTube | https://www.youtube.com/@businessbythebooks
Facebook | https://www.facebook.com/kickstartaccountinginc
Episode Transcript
00;00;00;00 - 00;00;28;21
Danielle Hayden
So you have accidentally put your business expenses on your personal card. Now what? Today we're going to be talking about the importance of not commingling business and personal expenses. What happens when you do commingle and what to do moving forward? My name is Danielle Hayden. I am the CEO and founder of Kickstart Accounting, Inc., where we use bookkeeping as a vehicle to help business owners take control of their numbers.
00;00;28;21 - 00;00;54;09
Danielle Hayden
And I've had thousands of entrepreneurs make informed financial decisions for over a decade. I just recently had a discovery call with a client who is interested in our bookkeeping and tax services here at Kickstart Accounting, Inc., and she asked me during the call, I am using my personal account because I get better points on my personal credit card rather than my business credit card.
00;00;54;10 - 00;01;19;04
Danielle Hayden
Just tell me, how bad is this? Now I reassured her, it's not the end of the world that we will, in the bookkeeping, be able to handle it correctly so that her taxes are correct. But moving forward, I really want her to use the correct card so that she is protected from the IRS. And to make things cleaner and simpler for bookkeeping and business health.
00;01;19;05 - 00;01;46;13
Danielle Hayden
So what are some other examples of this happening? Well, it's not all about the points. Sometimes we withdraw money from the company debit card for personal purchases. Sometimes we take cash from the business for personal use. Sometimes we put a personal bill on a company card. There are times we're going to accidentally commingle. But let's walk through today the importance of why we need to stop commingling, what we can do moving forward.
00;01;46;15 - 00;02;20;22
Danielle Hayden
Now, the number one reason why you need to stop commingling immediately is to legally protect your entity. You may lose the liability protection that having an LLC provides. Commingling funds ends this protection. I'm not an attorney, but what lawyers call this is piercing the corporate veil. A pierced veil means that creditors can take you to court and argue that your business and you are not separate and come from all of your personal private belongings when there is a pattern of commingling funds.
00;02;20;23 - 00;02;46;01
Danielle Hayden
This hurts the integrity of your business's entity, and you expose yourself to risk. When you establish this pattern of bad business practices, the integrity of the business deteriorates. Now, I don't care how small of a business you're running. No matter how small you are, I want you to have that legal protection of your business. And so let's stop that commingling so that we are not piercing that veil.
00;02;46;03 - 00;03;16;14
Danielle Hayden
Next is business health, okay. Overall when we commingle, we create a bookkeeping nightmare. Tracking expenses become so much harder when business and personal finances are mixed together. There's just no clear way of knowing how your business is really doing or your bookkeeper is left to guess and to work through manual processes with you to determine what business and what's personal.
00;03;16;15 - 00;03;40;08
Danielle Hayden
And it leaves you with an incomplete picture of your financial health, both for your business and for you personally, right? All of your financial reports are almost contaminated by the expenses of your personal life, that they really have nothing to do with your business. And so it's really important that we're able to determine what's the business health and what's my personal financial health.
00;03;40;08 - 00;04;03;01
Danielle Hayden
We had a client who we worked with over the last few years, where he was having a lot of difficulty managing in cash. And as we worked through finding profitability for him and his business, really what we found by going through all of the expense was that he didn't have a business spending problem. He really had a personal spending problem.
00;04;03;01 - 00;04;35;03
Danielle Hayden
Commingling meals and vehicle travel and family vacations with business trips. And it wasn't actually the business that he needed to cut back on. It was really his personal spending, and it took us a lot of time and energy on both parties to determine where the gaps were in his business. We weren't able to easily point to the areas to make changes in his business, to create profitability, because we had to determine where those expenses were coming from to then act accordingly.
00;04;35;04 - 00;05;01;15
Danielle Hayden
Now lastly, I'll say in terms of business health is cash is the number one reason why businesses fail. If you are struggling with cash in your business and you cannot properly identify the problem, you might be commingling funds. So just like our client, do you have a personal spending problem or do you have a business spending problem? Let's stop the commingling so that we can clearly and easily see the problem.
00;05;01;18 - 00;05;24;27
Danielle Hayden
Now, if you have a bookkeeping team, if you are part of the Kickstart Accounting money team, if we are your money team, we are doing everything we can on the backend to make sure that these expenses are classed accordingly as owner's drawers and personal expenses. However, it will make it feel unclear to you when you're looking at your business bank account as to what impact your spending is having now.
00;05;24;27 - 00;05;50;06
Danielle Hayden
Lastly, it becomes harder to claim tax deductions and it really opens yourself up to an IRS audit when you are co-mingling these funds. If you find yourself with personal taxes being audited and the auditor finds business expenses mixed in, it can trigger an audit of your business as well. So we want to keep those clean so that we are not trailing the auditor into our business or into our personal.
00;05;50;11 - 00;06;25;08
Danielle Hayden
Now, to be clear, is co-mingling a crime? If you are part of a multi-member LLC or a corporation, your fellow owners may consider co-mingling funds a form of theft. If you solely own your business. If you solely own your LLC, this is not a crime. But as I mentioned, it opens you up to an IRS audit. It makes tracking the health of your business more difficult, and it opens you up to piercing the corporate veil and can expose your personal assets.
00;06;25;11 - 00;06;46;17
Danielle Hayden
So I think we can all agree we have enough backup. We have enough reasons to stop co-mingling on a regular basis. But what do you do if you have commingled those funds? So as we approach the end of the year, we are sending constant reminders to our clients that if they have commingled, it's okay. But clearly communicate with us.
00;06;46;17 - 00;07;10;05
Danielle Hayden
So it is really important at this time that you comb through your transactions and you identify the ones that are personal expenses. Now you have two options. From there, you can enter those personal expenses and run them through payroll and pay payroll taxes on them. Or you can class them as an owner's draw. If you are an LLC, these personal expenses will be an owner's draw.
00;07;10;05 - 00;07;34;08
Danielle Hayden
It's okay. Like I said, it just it makes the health of the business cloudy. However, if you are an S-corp and you have not paid yourself a reasonable compensation and you are using your business account for personal expenses, these are considered an owner's draw and as an S-corp until you've paid yourself a reasonable compensation, you cannot take owner's draws from your business. And so we may need to run those personal expenses through payroll and pay payroll taxes on them so that we can increase your reasonable compensation.
00;07;34;08 - 00;08;04;17
Aubrey Philipp
Real quick, are you struggling with tax deductions or how much to pay yourself as a business owner? Get the how much to pay yourself as a business owner? Calculate and the guide to the six tax tips every business owner should now go to Kickstart Accounting Inc.com/gift to simplify your financials today.
00;08;04;17 - 00;08;33;06
Danielle Hayden
Okay, back to the show. So your action as a business owner right now, if you have put personal expenses on your business account, you will go through the list of transactions that your bookkeeper has sent you to determine which expenses are truly personal and which expenses are truly business. Now, again, as a Kickstart Accounting client, we will be sending you the list of expenses that we currently have listed as personal.
00;08;33;06 - 00;08;56;13
Danielle Hayden
We do our best to guess, an educated guess, between business and personal, but we need your help. We need you to verify that information for us. So you'll take that list from your money team and you will determine with us what is personal and what is business. Now, if you've put expenses on your personal account, that are really for business, we won't see them.
00;08;56;13 - 00;09;25;08
Danielle Hayden
And so therefore you need to create a list of any expenses that you have put on your personal bank account or debit card or credit card. You will accumulate that list and send that to your money team so that they can properly account for those transactions within your accounting software. Now remember, as a C Corp and S-Corp, you have an option for an accountable reimbursement plan, which resolves some of these co-mingling issues for you.
00;09;25;14 - 00;09;53;26
Danielle Hayden
I will link in the show notes are accountable plan episode so you can determine if this is right for you to continue to be reimbursed from your business account to your personal account for those personal expenses. Now you guys know I like to give you simple solutions and actions to take moving forward. So when you are done with this episode, I want you to make sure that you have completely separated your business and your personal accounts and credit cards.
00;09;53;26 - 00;10;22;21
Danielle Hayden
I hear you if you have a credit card that has awesome rewards, I understand it can be really tempting to use one card or another, but it might be time to explore the other options. Can you get another business card that has better point options that you enjoy, so that you'll want to use your business card? I recommend once a year, maybe every other year, to look at the credit cards that you are using, both in your business and your personal.
00;10;22;21 - 00;10;52;00
Danielle Hayden
There are so many options out there today, and I am regularly looking for the best card options for myself and for Kickstart. So take this time to separate and find the best credit card options for you and your business, so that you'll feel comfortable using the right credit card. I know that there are those sneaky reoccurring subscriptions on either our business account or a personal account, and I am one of those people that those types of admin tasks.
00;10;52;03 - 00;11;12;02
Danielle Hayden
They are so draining on me that the last thing I want to do, I hear you, I get you, find the help or just take the time and get all those sneaky expenses onto the right card. If it is a business subscription, it should be on the business credit card. You guys get it. If it's a personal expense.
00;11;12;02 - 00;11;34;24
Danielle Hayden
Truly. Seriously, if you are not using it for your business, get that subscription over to your personal credit card. If you find yourself buying something for your business and you only have your personal card available, it's okay. Just make sure you talk to your bookkeeper and properly record that expense. I don't want you to lose out on business expenses and tax deductions.
00;11;34;24 - 00;12;03;01
Danielle Hayden
Well, why are we paying the IRS any more than what we have to pay? Let's get those expenses recorded into our business account so we can take the tax deduction so that we can take that business expense like you deserve. So if you are a client, you are going to be receiving a list of the transactions that we have recorded as a personal expense review and send them back to us so that we can properly move any business expenses to the income statement.
00;12;03;01 - 00;12;23;21
Danielle Hayden
If you are not a client and you want some accountability and a team who's going to be regularly sending you this information, I want to invite you to come and book a discovery call. Our team is here and ready to be a resource for you. You do not have to do any of this alone. I get it, this is the last thing in the world most people want to do.
00;12;23;21 - 00;12;44;12
Danielle Hayden
And I have a team of accounts and bookkeepers who freaking love this stuff. They love it and they are more than happy to hold you accountable. All right. Go to Kickstart Accounting Inc.com and book a call. We are here to be your money team.
00;12;44;14 - 00;13;35;10
Danielle Hayden
I hope you enjoyed today's episode of Business by the Books. Don't forget to hit like and subscribe! This is the number one way we can help other entrepreneurs find this podcast because here at Kickstart Accounting, it is our mission to help entrepreneurs understand their numbers, get access to this information, and grow and thrive in their business. So please help me help other entrepreneurs understand their numbers so they can finally grow and thrive.