TAX TRAP: PAYING PERSONAL EXPENSES FROM YOUR BUSINESS ACCOUNT
As a business owner, it is important that you do not commingle your personal and business finances.
Should you ever be subject to an IRS audit, commingling personal and business acocunts can lead to additional taxes, IRS penalties, and interest charges.
Paying personal expenses from your business account is a BIG NO NO. Here's why.
You cannot treat personal expenditures as a business expense, no matter what legal form your business operates as.
If you are a sole proprietor or a single member LLC treated as a disregarded entity, paying personal expenses from a business account is treated as on owner's draw. The business does not issue a FORM 1099-DIV and gets no tax deduction.
If you are a C Corporation, your distributing profit of the corporation on behalf of the shareholder, which will require that you issue a FORM 1099-DIV at the end of the year to the shareholder. The corporation gets no deduction and the shareholder receives taxable dividend income.
If you are either an S Corproation or a Partnership LLC, these expenditures are deemed shareholder or member distributions. Although no FORM 1099-DIV is issued, excess distributions more the the individual's basis in the entity could result in taxable capital gain. Again, the business gets no deduction for these distributions.
If you own a business, treat is as a business. Keep you books clean. You never know when the IRS may come calling.