Hidden costs and risks of mixing business and personal expenses

A common mistake made by many business owners is the failure to maintain separate business and personal expenses.  Whether paying for personal items out of your business bank account or using a personal credit card to make business purchases, this business practice is one that ends up being problematic for multiple reasons.

Mixing business and personal expenses creates extra work for your accountant (which means more fees), pierces your corporate veil (leaving you open to legal liability), and costs you precious time sorting expenses. Perhaps most problematic of all however, is the huge red flag it raises for the IRS.

In fact, if you continue to mix your business and personal expenses, you might as well mail the IRS a handwritten invitation with the words “audit me!” Because it’s going to happen. 

If that isn’t reason enough, keep reading. 

In this blog, we’re going to walk you through 5 important reasons why you should stop mixing your business & personal expenses now! 

Let’s dive in. 

Reason #1: The IRS Really Doesn’t Like It

As mentioned, the IRS does not want you mixing business and personal expenses. And if you’ve ever been audited – or know someone who has – that alone should deter you.

The IRS refers to mixing business and personal expenses as “commingling’.  It’s a dirty word and more frowned upon than not sorting your recyclables.

IRS auditors are taught to look for commingling, and if they spot it, expect them to question everything. 

“Oh, you bought supplies? Show me the receipts.” 

“How can you prove that the supplies weren’t used at your house since expenses are commingled?”

You get the idea – it’s not pretty. 

And they will do this with every expense, making it close to impossible to prove business use for every item you’ve claimed. 

Trust us on this. It’s a nightmare for clients who are audited. 

And if you don’t trust us, you can see it right here on the IRS website where it says, “commingling of accounts warrants a more in-depth analysis.”

Don’t say we didn’t warn you! 

Reason #2: You’re Busy Enough

If an IRS audit isn’t enough to make you stop mixing your business and personal expenses, then think about the time you waste having to sort through multiple account transactions for your bookkeeper and/or accountant. 

As a fitness business owner, you’re short on time as it is. 

It’s much easier to use the right card (e.g., a credit card linked to your business bank account) than it is to sort through a hodgepodge of personal and business expenses each month.  If you prefer paying for items out of your checking account or with a debit card, best practice is to designate your business account for business purchases only, and move money into the account if more funds are needed in the business account.  Resist the urge to swipe use a personal account just because that is where the funds are.

Reason #3: It Will Cost You More Money in Accounting Fees $$

Separating out personal and business expenses are out-of-scope transactions, and not typically part of your monthly engagement with bookkeepers and accountants. 

It’s likely that you’re paying more money to your accountant each month by having them sort through your purchases. 

When personal expenses are mixed in with business, it can interrupt an accounting team’s processes and timelines, adding hours of work each month, which in turn can end up costing you hundreds of dollars unnecessarily.

In addition to keeping accounting fees down, making an effort to maintain a separation between your business and personal expenses has other benefits.  Your accountant will love knowing you are not commingling funds, as it saves them time and reduces concern that you’ll be audited in the future.  As an added bonus, when your accountant’s work is efficient, they won’t mind going the extra mile when you do occasionally need something out of the ordinary.

Reason #4: It Creates Legal Liability for You

Another serious reason to consider using your business card strictly for company purchases is that commingling funds will create additional legal liability for you and your business.

And while your insurance policy is always your first line of defense when it comes to liability issues, commingling still ultimately puts everything you’ve built and saved at risk. 

“Commingling funds between personal and business accounts pierces the corporate veil, allowing creditors to come after you personally for business or corporate debts and liabilities.

It is the first strategy an adversary will take when attempting to collect upon a debt or liability of your business.  

The corporation exists as a separate “entity” from you personally, and it is this entity that protects your personal assets from the debts of the business.  

When you commingle funds between personal and business accounts you blur the line between the legal entities of “you” (the person) and “your corporation” (the business).”  

Take it from a legal expert, here.

If you want to take small steps to reduce injury liabilities from arising at your facility, then check out our blog post with the fitness insurance experts at Nexofit here.

Reason #5: You’re Likely to Miss Out on Deductions

Last but not least, if you’re in the habit of using your personal card for business purchases, it’s likely you are going to either forget or overlook some of those expenses at least a few times, resulting in lost tax deductions. This can end up costing you thousands of dollars in taxes because the expenses will be missing from the books. 

At The Fitness CPA, we had a client accidently neglect to report ~$80,000 of expenses because they “forgot” they had paid for their new HVAC system personally. 

Thankfully we are familiar with fitness business operations and noticed that no HVAC expenses had been paid. We inquired about the missing expenses and ultimately saved them tens of thousands of dollars in taxes!

While it is invaluable to have an accountant that knows enough about your industry to spot potential discrepancies, it’s certainly not a reliable method for capturing all the business expenses you paid for personally.  Also, in many cases, it’s not the large purchases that are overlooked, but instead, several small expenditures that quickly add up.

In Short? It’s Time to Stop! 

While we all use the wrong card once or twice throughout the year, it should not be a recurring issue.

All of the consequences we’ve written about today can be prevented by always paying for business expenses from the business account, even if you move funds from elsewhere to the business.  

How does this work in practice?  

• – Checking account low on funds: simply make an online transfer from your personal account to your business account before making the business purchase.  

• – Credit card near the limit: simply login and make a same day payment or use a different card.

Either can be done on a mobile phone or website in seconds, which is one of the primary reasons we recommend that your business and personal banking are at the same institution.

The risk to your business, both legally and financially, is simply not worth the few minutes it takes to pay from the correct account each time. 

As always, if you need extra help organizing and managing your fitness business expenses ongoing, we would love to help. 

Simply get in touch with us by filling in the form here, and we’ll get back to you as soon as we can. 

In the meantime, you might enjoy this blog we wrote about paying employees vs. contractors in your fitness business.

See you next time!