Taxpayers Guide to LLCs and S Corps
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Comingling of Money
By Jason Watson, CPA
Posted Tuesday, October 12, 2021
We’ve mentioned this previously, and we’ll do it again here. Rule #1- Please get a separate checking account for your business, preferably with the same bank as your personal checking account so transfers (shareholder distributions) are easy. Rule #2- Do not pay for personal expenses or any mixed-use expense with business funds.
This is bad for several reasons- the IRS hates it. It erodes the corporate veil which is already dangerously thin since you are a closely held corporation. Lastly, if you need to re-construct your financials because of a QuickBooks disaster or some other disaster, having your business transactions compartmentalized within a bank account makes life better. All money coming in is income. All money going out is an expense or a distribution.
Do you get the feeling that we’ve said these words before? Like déjà vu? Ever have vuja de? It is the feeling that this has never happened before- opposite of deja-vu. Yes, we did mentioned this before in Chapter 10 on operating your S Corp. Here it is again.
Read Rule #2 again. It is imperative to keep an arms-length perspective on you, the employee, and relationship with the S corporation. If you worked for Google or Ford, you wouldn’t be able to get the business to buy your groceries or pay your mortgage directly. Same thing with your business. Here is another quick table to help you out with the “Which debit card should I use?” question.
|Cash Outflow||Checking Account To Use|
|Car Lease||Personal, unless lease is in business name.|
|Gas for Car||Personal, unless owned / registered by business|
|Estimated Tax Payments||Personal, since an S Corp is a pass-through entity|
|Cell Phone||Personal, reimbursed through Accountable Plan|
|Home Utilities||Personal, reimbursed through Accountable Plan|
|Home Office Renovations||Personal, possible partial reimbursement|
|DSW, Banana Republic||Personal, but it would be nice|
|Self-Employed Health Insurance||Business|
|Out of Pocket Medical||Personal, unless you have an HRA|
|Accountable Plan Reimbursements||Business|
|SEP IRA Contribution||Business, but you should use a 401k instead|
Read Chapter 10 on operating your S Corp and specifically the section on Accountable Plans for more information on getting reimbursed as an employee of your S Corp for those expenses that are both personal and business such as cell phones, home offices, internet, etc.
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