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  • Diana Miret

Question # 10 – Is it wrong to charge personal expenses to the business?

Wrong? Sometimes.


Ill advised. Yes.


From our friends at the IRS: Question

I'm a sole proprietor and pay personal expenses out of my business bank account. Should I include the money used for personal expenses as part of my business income? Can I write these expenses off?


Answer


  • You would include the money used to pay personal expenses in your business income when your business earned it.

  • You wouldn't write off these expenses as business expenses because they're not ordinary and necessary costs of carrying on your trade or business.

  • Personal, living, or family expenses are generally not deductible.

  • It's a good idea to keep separate business and personal accounts as this makes it easier to keep records.”

https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-1



As a CFO, I ask my clients to stop using the business bank account as a personal ATM for 2 reasons. There are more, but these are my top 2:


1. If you want to sell the business someday, you are mis-representing your profits to the future buyer. “My business really makes 12% profit, but the P&L shows 9% because I run my own expenses through.” Not a good way to start a negotiation with a prospective buyer.

2. If you have personal stuff flying through the accounts, how will you know how well the business is really doing? Even if you don’t want to sell the business, you may want to run it well, efficiently and profitably. If you cannot trust all the numbers, how will you do that?


ACTION ITEM: if you need more money to fund your life, give yourself a salary adjustment and pay for Chipotle, nail appointments, massages, and movie theatres from your personal bank account.

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