April 4, 2025 • 21 mins
Proper separation between business and personal finances is critical for protecting your painting business, minimizing tax liabilities, and ensuring legal protection through your LLC or corporation.
• Five key reasons to avoid co-mingling finances: legal protection, reduced audit risk, maximizing deductions, maintaining loan eligibility, and proper owner compensation
• Mixing personal and business finances breaks down your "corporate veil," potentially exposing personal assets to business lawsuits
• The IRS views co-mingled finances as red flags that increase audit probability and scrutiny of all deductions
• Paying for business expenses with personal funds can result in missed tax deductions unless properly documented
• Banks and lenders are more likely to approve business loans when they see clean, separated financial records
• Owner's compensation should be formalized - either as owner's draws for LLCs or as reasonable salary plus distributions for S-Corps
• S-Corporation owners must pay themselves a defensible "reasonable salary" that balances tax efficiency with IRS requirements
• Establishing good financial habits from the start is much easier than fixing problems after an audit begins
Join our Facebook group "Grow your Painting Business" with your questions about financial separation or accountable plans, and either Daniel or Richard would be happy to help you further.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
This is Daniel, the founder of Bookkeeping for
Painters.
I'm a CPA that worksexclusively with painting
businesses to help them knowtheir numbers and what they mean
and stay big in tax.
And today I'm here with RichardDunton, enrolled agent.
How's it going, richard?
It's going really well, daniel.
How are you?
I'm doing well.
I'm excited to talk abouttoday's topic, which is mixing
(00:24):
personal and business together.
This is like a big topic A lotof folks when they initially
come on board with us.
We kind of have to give themthis spill on why you want to
keep these two things separatebusiness and personal.
There's at least five things,probably more, five reasons why
(00:46):
you want to keep these twothings separate to protect
yourself and keep yourfinancials clean.
So I'm excited to jump intotoday's topic.
Speaker 2 (00:54):
Yeah, it is a very common thing that we see and
it's so easy to do.
Right, we're running out to thejob site and we go to grab
lunch and we swipe the businesscredit card.
Or maybe we're atSherwin-Williams and we just pay
cash out of our own pocket andwe got that.
They call it co-mingling in theaccounting industry and it's so
(01:15):
easy to do, but it really canbe something that damages our
business.
We want to make sure we don'tco-mingle because it's important
to protect our business.
Our money and even our personalassets could be at risk if we
had a bad habit of co-mingling.
(01:36):
So I'm not going to sugarcoatit, I've done it myself plenty
of times.
I think every business ownerhas.
But we're trying to break badhabits today.
Let's do it All right.
So you mentioned there's aboutfive reasons why we want to
avoid co-mingling and I thinknumber one is probably one of
(01:56):
the most important and also oneof the least well understood,
and that is the loss of legalprotection when you co-mingle
your finances.
Most everybody listening whohas a business probably has some
kind of a legal entity.
90% of you are probably LLC,maybe a few of you have a
(02:18):
corporation, and that's a reallygreat thing because those legal
entities give you separationbetween your personal life and
your business life and itprovides a certain amount of
protection.
We call that the corporate veil.
Think of like an invisible wallthat prevents people who are
suing your company from comingafter your personal bank
(02:41):
accounts and your personalassets.
It's very valuable to have.
It's really the primary reasonto have an LLC or a corporation.
But if we are co-mingling ourpersonal and our business
expenses, then we are liketaking a sledgehammer to that
wall.
We're just tearing down thatcorporate veil and we might
(03:04):
think, well, you know, that'sall very metaphorical, that's
all on paper, but when it comesto a lawsuit, everything is on
paper and a judge is going tolook at your business records
and they're going to say, hey, Idon't see a separation between
you and your company, right, Isee you know Netflix and
(03:26):
McDonald's and all this otherstuff coming out of your
business account.
It doesn't look like you areactually operating a separate
entity.
And so I think I'm going togrant the plaintiff's motion to
pierce the corporate veil andcome after you personally, and
that would be really reallytragic because then all of our
assets would be at risk.
So it sounds like a small thingand really it doesn't take a
(03:49):
whole lot of effort on our part,but it's super, super important
if we should ever beunfortunate enough to be in a
lawsuit, you know.
So you might think about.
Just as an example, let's sayyou know you have an accident on
the job site.
Maybe one of your guys spills agallon of paint on a $10,000
(04:11):
Persian rug and that homeownersues you.
Maybe they can collect ajudgment against your business
account.
But we want to protect ourpersonal account, our 401k,
things like that.
So how do we do that?
Well, we want to have a businesschecking account, not a
(04:32):
personal checking account, thatwe pay for all of our business
expenses out of.
And while we're at it, let'salso get a business credit card
in the name of the business.
We might co-sign or be asecondary on there, but the
primary should be the name ofour entity and we're only going
to use that business card forbusiness related purchases and
(04:55):
we're never going to pay ourpersonal bills from our business
account.
If we need money from thebusiness, we're going to take
that in the form of owner's payand we'll talk more about how we
do that later on but those paysare going to be deliberate and
intentional.
It's not going to be, you know,paying for personal expenses
(05:17):
with a company.
Check, yeah.
Speaker 1 (05:21):
I was going to say one quick note on setting up
those business checking accountsand business credit cards, like
you said in the business name,under the EIN of that business.
So if you have an LLC or acorporation set up, you should
have an employer identificationnumber, which is basically like
a social security number for abusiness, and make sure that the
(05:44):
accounts are opened up underthat EIN of that business so
that you have that separation.
Speaker 2 (05:53):
Absolutely.
It's just a matter of dottingthe I's and crossing the T's and
making sure that the paperworklines up.
So, yeah, try to haveeverything under that business
account.
The second reason we don't wantto combine our personal and
business finances is that wewould increase our audit risk by
(06:17):
doing so.
When you have a lot of personalexpenses inside your business
account, it's like waving redflags, asking the IRS to look
into your situation more closely.
This is something that they arelooking for, especially if you
have a corporation and maybe youhave multiple shareholders.
(06:38):
If you're an S corporation,those shareholders need to take
distributions according to theirpercentage of ownership or pro
rata share.
So if your distributions getlopsided like you're 50-50
partners but you're spending alot more of the company money on
personal expenses than yourpartner is now, we're just
(07:09):
really shooting a flare, saying,hey, something's wrong here,
and we're inviting the IRS andthey said well, we see that
you've got, like you know,$5,000 of automobile repairs and
$10,000 of materials this month.
But we also see Netflix andgroceries, and then Amazon.
What's Amazon?
Well, that's business.
(07:29):
Can you prove it?
Do you have the receipts?
Can you show me the businesspurposes?
If not, they're going to beinclined to disallow it because
they've already got evidencethat personal expenses are going
on here.
So now they're going to holdyour feet to the fire and really
force you to prove all of yourbusiness expenses.
(07:50):
They have the right to denythose deductions and then the
ball is in your court to proveotherwise.
That's going to increase yourtaxable income.
It's going to add penalties andinterest.
It's not going to be a good day.
So let's not tempt the IRS bypaying personal bills from our
business account.
You know we'll pay ourselvesproperly and again, we'll talk
(08:13):
about that as we go on.
Speaker 1 (08:16):
Yeah, and I think some folks with the IRS audits
folks think that, oh, that's notgoing to happen to me, it's
never happened to me before, soit's not going to happen to me
in the future.
But if you I think that I thinkthe stat is somewhere around
(08:37):
one percent of businesses orsomething like that you have a
one percent chance of gettingaudited.
I think is the number that'sthrown around, which you know we
obviously work with uh, we'veworked with hundreds of painting
painting businesses and it doesseem to be about a handful of
folks at any point in time aregoing through some kind of audit
, and so it kind ofapproximately, I would say, line
(08:58):
up with that rule of thumb of1% chance.
And if you're in business forany length of time or if you
plan on being in business forthe extent of your career, it's
not really a question of ifyou're going to get audited,
it's a question of when you'regoing to get audited.
So definitely take thisseriously.
(09:20):
It's getting in the good habits.
Once you have these good habitsestablished, it's too easy to
do.
The problem is if you get intothese bad habits and then you're
going to have to deal with allthis pain of an audit and denied
deductions and all this stuff.
So it's good to just establishthose bad habits from the
(09:41):
beginning, or from starting now,so you don't have to worry as
much moving forward.
Speaker 2 (09:48):
Yeah, absolutely.
I have helped a few clientsthrough audits and it's not
pretty.
I have helped a few clientsthrough audits and it's not
pretty.
The IRS is demanding bankstatements and if you don't
provide them, they will get yourbank to send them through a
subpoena and they willscrutinize every line.
And it's not like innocentuntil proven guilty with the IRS
(10:09):
.
If they think that you'recommingling, they're going to
assume the worst abouteverything and then they're
going to make you prove thatthese were actually business
expenses.
Unless you've got the receipts,it's going to be very, very
difficult to do so.
(10:36):
Yeah, so the third reason wedon't want to commingle is we
don't want to lose out onpotential deductions by using
personal money for businessexpenses.
So you know, you imagine youwalk into Sherwin-Williams, you
buy some roller covers, you buysome tape because they've got a
great sale going on, and maybeyou pay for it with a $100 bill
out of your pocket.
You don't think much about it,but how are you going to make
sure that those supplies areproperly deducted from your
(10:56):
business income?
Now, there are ways to do it.
You know we can do owner'scontributions, things like that,
but by default you're going tomiss out on that deduction
unless we've got a good recordof it in your business account.
So you know, one thing that wedo with our tax planning clients
(11:16):
is every quarter we're doingwhat's called an accountable
plan expense report and this isset up for those personal
expenses so that we'redocumenting them and that we are
reimbursing the business ownerfrom the corporation for those
personal expenses.
It's also a great way tocapture things that aren't
(11:39):
necessarily like cashtransactions.
So maybe you have a home officethat you're running your
company out of or you're using apersonally owned vehicle for
business.
We're going to capture thevalue of those assets and we're
going to make sure that you getreimbursed.
Now, if you don't do anaccountable plan reimbursement,
(12:00):
you're probably going to missout.
Or if you don't do them on timeand you don't do them according
to the rules, the IRS has theright to reclassify those
reimbursements as like draws ordistributions and then they're
going to disallow that deduction.
So the best course of actionmake sure you pay for everything
(12:22):
from the business account andif there is an occasional
personal use of money, yourecord that in your accountable
plan and you go through theright steps to be properly
reimbursed so that you get yourmoney tax-free out of the
company and the company gets thededuction when they file the
corporate taxes.
(12:45):
All right, number four this isone that we don't think about
too much, but it certainly couldbe a problem, and that is
business credit and loans couldbe denied.
Now why would that be the case?
Well, the bank is going to wantto look at your business
records to see if your companyis profitable enough so that
(13:07):
they can feel confident inloaning money.
And if they can't get a clearidea of what your profit is,
because there's so many personaltransactions in there, they're
not going to feel comfortableunderwriting that loan or that
line of credit.
Imagine how embarrassing itwould be to be showing your bank
(13:27):
records to the banker andyou're saying, well, you got to
take this out and you got totake that out, and that doesn't
really count.
And if you move this over here,it all looks good.
You're just kind of erodingaway their confidence in you.
How much better would you feeland more confident would you
feel if you walked in with aclean P&L, a clean balance sheet
(13:48):
, no co-mingling, and now thebank feels very confident about
giving you that line of creditthat you need.
This does happen from time totime.
Banks don't really need areason to deny a loan other than
they don't feel good about it,so we don't want to give them
anything that might accidentallyspook them.
(14:09):
The way that we can build agood relationship with the bank
and build that good will is tohave a business checking account
and a business credit card withthat bank.
They can see that you have ahistory of paying your credit
card on time, you're notoverdrawing, you're not having
(14:32):
bad checks, and they can see allof your business expenses
coming out of those businessaccounts.
Having those, you know, nice,clean, separated financials is
going to be important to them,be important to them.
(14:53):
So those are kind of the fourreasons why we do not want to
mix business and personal.
But now how do we properly payourselves out of our company?
Because obviously we're workinghard so that we can provide for
ourselves and our families.
So if we're not going to payfor personal expenses directly
out of the business, how do wetake proper owner's pay?
(15:14):
Well, it's going to depend onwhether you have a LLC that is
disregarded, so also known aslike a sole proprietorship, or
if you have corporate taxation.
If you are a disregarded LLC,aka sole proprietor, then you
are going to take owner's drawsand this is going to be a formal
(15:39):
writing of a check from thebusiness account to yourself
with owner's draw in the memo.
It's going to happen on asomewhat regular basis.
It doesn't have to be superformal but it shouldn't be
sloppy or haphazard.
Right, a $4.50 owner's draw tobuy McDonald's well, mcdonald's
(16:04):
is way more than $4.50 now,isn't it?
I'm thinking back in the 90s isway more than four and a half
bucks now, isn't it?
I'm thinking back in the 90s.
But you know I'm getting that.
You know 10 bucks here andthere to buy McDonald's is not a
good way of doing owner's draws.
Much better to have like a setmonthly amount and then you can
give yourself additional amountsbased on if you have extra
(16:25):
profit that month.
Now, if you are an S-Corp,you're going to do something
similar, but you are also andforemost going to pay yourself a
reasonable salary.
That is a formal salary ranthrough payroll, with payroll
taxes and withholding taken out,filing 941s with the IRS, taxes
(16:48):
and withholding taken out,filing 941s with the IRS, filing
paperwork with the state, andit's going to be an amount that
is commiserate to what you do inyour business, and this is a
very formal salary and it'srequired for people who have
S-Corps.
(17:12):
It is something that you don'twant to take lightly, because if
you do not pay yourself areasonable salary, the IRS is
not getting any payroll taxesand that makes them very, very
cranky and it makes them want tolook into your situation to see
what else you might not bepaying.
So I encourage my clients to beaggressive with their salaries,
and by aggressive I mean tryingto keep it very modest so that
(17:35):
you are only paying the minimumamount of payroll taxes, but
having it at a level that isdefensible and reasonable based
on what you do, and that's goingto be different depending on
where you live, how many hoursyou work in your business, what
your role is in the business.
So we do very comprehensivesalary recommendations at our
(18:03):
firm, helping people knowexactly what they can pay
themselves to minimize payrolltax, but also have a very
rock-solid, defensiblerecommendation that would stand
up to scrutiny.
Now, once you've paid yoursalary, then you would be
entitled to distributions.
We call them owner's draws anda sole prop.
We're going to call themdistributions in an S-Corp, but
(18:23):
it's the same concept a regulardistribution that's paid on a
monthly or a quarterly basis,preferably like a percentage of
the profits, and those wouldcome to you free of any kind of
payroll tax.
Speaker 1 (18:41):
Yeah, and going back to the reasonable officer salary
, it's super important to getthat salary dialed in.
We just onboard a new clienttoday actually and looking
through what he was payinghimself via salary for his
S-Corp officer salary and hepaid himself $163,000 for the
(19:03):
year, which is very high,especially considering his
business is a good size businessa little over a million, but
nothing too crazy.
But he had a very high salaryand he was just doing basic
business owner stuff, so hecould have probably had a salary
(19:23):
about $100,000 lower and savedhimself about $15,000.
So make sure you're gettingthose reasonable officer
salaries dialed in for what youactually would have to pay
someone else, like the marketrate, and getting those items
because you don't want to payyourself too high of a salary,
(19:44):
but you also don't want to payyourself too low of a salary to
make the IRS upset.
So that's an easy way you cansave big in tax there.
Speaker 2 (19:53):
Yeah, that's a great point.
I think the social securityoffice should send him like a
fruit basket or something,because he's probably been
single-handedly keeping his areafunded.
Yeah, High payroll taxes isgreat for the social security
and the Medicare.
It's not so great for you as abusiness owner.
(20:15):
So pay your fair share, but nomore than that is is the way to
do it.
Speaker 1 (20:21):
Yeah, especially with all those 190 year olds that
are out there drawing security.
Speaker 2 (20:28):
Yeah, so 90-year-olds that are out there drawing
Social Security.
Yeah, so just kind of the keytakeaways from this episode.
You know it seems like a simplething, but why do you not want
to mix business and personal?
Well, you lose your legalprotection, you put yourself at
an increased IRS audit risk, youcould be missing out on some
(20:52):
very valuable tax deductions andyou could be making it very
difficult for your company toget a loan or a line of credit
in the future.
The way you fix this is to payyourself correctly and then to
only spend your personal moneyon personal expenses.
So if anyone has any questionsabout how to do that or how an
(21:18):
accountable plan works, wherethey need help getting their
salaries dialed in, we wouldlove to hear from you.
You can go to our Facebookgroup Grow your Painting
Business, jot down your questionthere in the comments and
either Daniel or I would behappy to talk to you further
about that.
If you found this podcasthelpful, we hope that you
(21:39):
subscribe and we hope that youjoin us on the next episode.
This is Daniel, the founder of Bookkeeping for
Painters.
I'm a CPA that worksexclusively with painting
businesses to help them knowtheir numbers and what they mean
and stay big in tax.
And today I'm here with RichardDunton, enrolled agent.
How's it going, richard?
It's going really well, daniel.
How are you?
I'm doing well.
I'm excited to talk abouttoday's topic, which is mixing
(00:24):
personal and business together.
This is like a big topic A lotof folks when they initially
come on board with us.
We kind of have to give themthis spill on why you want to
keep these two things separatebusiness and personal.
There's at least five things,probably more, five reasons why
(00:46):
you want to keep these twothings separate to protect
yourself and keep yourfinancials clean.
So I'm excited to jump intotoday's topic.
Speaker 2 (00:54):
Yeah, it is a very common thing that we see and
it's so easy to do.
Right, we're running out to thejob site and we go to grab
lunch and we swipe the businesscredit card.
Or maybe we're atSherwin-Williams and we just pay
cash out of our own pocket andwe got that.
They call it co-mingling in theaccounting industry and it's so
(01:15):
easy to do, but it really canbe something that damages our
business.
We want to make sure we don'tco-mingle because it's important
to protect our business.
Our money and even our personalassets could be at risk if we
had a bad habit of co-mingling.
(01:36):
So I'm not going to sugarcoatit, I've done it myself plenty
of times.
I think every business ownerhas.
But we're trying to break badhabits today.
Let's do it All right.
So you mentioned there's aboutfive reasons why we want to
avoid co-mingling and I thinknumber one is probably one of
(01:56):
the most important and also oneof the least well understood,
and that is the loss of legalprotection when you co-mingle
your finances.
Most everybody listening whohas a business probably has some
kind of a legal entity.
90% of you are probably LLC,maybe a few of you have a
(02:18):
corporation, and that's a reallygreat thing because those legal
entities give you separationbetween your personal life and
your business life and itprovides a certain amount of
protection.
We call that the corporate veil.
Think of like an invisible wallthat prevents people who are
suing your company from comingafter your personal bank
(02:41):
accounts and your personalassets.
It's very valuable to have.
It's really the primary reasonto have an LLC or a corporation.
But if we are co-mingling ourpersonal and our business
expenses, then we are liketaking a sledgehammer to that
wall.
We're just tearing down thatcorporate veil and we might
(03:04):
think, well, you know, that'sall very metaphorical, that's
all on paper, but when it comesto a lawsuit, everything is on
paper and a judge is going tolook at your business records
and they're going to say, hey, Idon't see a separation between
you and your company, right, Isee you know Netflix and
(03:26):
McDonald's and all this otherstuff coming out of your
business account.
It doesn't look like you areactually operating a separate
entity.
And so I think I'm going togrant the plaintiff's motion to
pierce the corporate veil andcome after you personally, and
that would be really reallytragic because then all of our
assets would be at risk.
So it sounds like a small thingand really it doesn't take a
(03:49):
whole lot of effort on our part,but it's super, super important
if we should ever beunfortunate enough to be in a
lawsuit, you know.
So you might think about.
Just as an example, let's sayyou know you have an accident on
the job site.
Maybe one of your guys spills agallon of paint on a $10,000
(04:11):
Persian rug and that homeownersues you.
Maybe they can collect ajudgment against your business
account.
But we want to protect ourpersonal account, our 401k,
things like that.
So how do we do that?
Well, we want to have a businesschecking account, not a
(04:32):
personal checking account, thatwe pay for all of our business
expenses out of.
And while we're at it, let'salso get a business credit card
in the name of the business.
We might co-sign or be asecondary on there, but the
primary should be the name ofour entity and we're only going
to use that business card forbusiness related purchases and
(04:55):
we're never going to pay ourpersonal bills from our business
account.
If we need money from thebusiness, we're going to take
that in the form of owner's payand we'll talk more about how we
do that later on but those paysare going to be deliberate and
intentional.
It's not going to be, you know,paying for personal expenses
(05:17):
with a company.
Check, yeah.
Speaker 1 (05:21):
I was going to say one quick note on setting up
those business checking accountsand business credit cards, like
you said in the business name,under the EIN of that business.
So if you have an LLC or acorporation set up, you should
have an employer identificationnumber, which is basically like
a social security number for abusiness, and make sure that the
(05:44):
accounts are opened up underthat EIN of that business so
that you have that separation.
Speaker 2 (05:53):
Absolutely.
It's just a matter of dottingthe I's and crossing the T's and
making sure that the paperworklines up.
So, yeah, try to haveeverything under that business
account.
The second reason we don't wantto combine our personal and
business finances is that wewould increase our audit risk by
(06:17):
doing so.
When you have a lot of personalexpenses inside your business
account, it's like waving redflags, asking the IRS to look
into your situation more closely.
This is something that they arelooking for, especially if you
have a corporation and maybe youhave multiple shareholders.
(06:38):
If you're an S corporation,those shareholders need to take
distributions according to theirpercentage of ownership or pro
rata share.
So if your distributions getlopsided like you're 50-50
partners but you're spending alot more of the company money on
personal expenses than yourpartner is now, we're just
(07:09):
really shooting a flare, saying,hey, something's wrong here,
and we're inviting the IRS andthey said well, we see that
you've got, like you know,$5,000 of automobile repairs and
$10,000 of materials this month.
But we also see Netflix andgroceries, and then Amazon.
What's Amazon?
Well, that's business.
(07:29):
Can you prove it?
Do you have the receipts?
Can you show me the businesspurposes?
If not, they're going to beinclined to disallow it because
they've already got evidencethat personal expenses are going
on here.
So now they're going to holdyour feet to the fire and really
force you to prove all of yourbusiness expenses.
(07:50):
They have the right to denythose deductions and then the
ball is in your court to proveotherwise.
That's going to increase yourtaxable income.
It's going to add penalties andinterest.
It's not going to be a good day.
So let's not tempt the IRS bypaying personal bills from our
business account.
You know we'll pay ourselvesproperly and again, we'll talk
(08:13):
about that as we go on.
Speaker 1 (08:16):
Yeah, and I think some folks with the IRS audits
folks think that, oh, that's notgoing to happen to me, it's
never happened to me before, soit's not going to happen to me
in the future.
But if you I think that I thinkthe stat is somewhere around
(08:37):
one percent of businesses orsomething like that you have a
one percent chance of gettingaudited.
I think is the number that'sthrown around, which you know we
obviously work with uh, we'veworked with hundreds of painting
painting businesses and it doesseem to be about a handful of
folks at any point in time aregoing through some kind of audit
, and so it kind ofapproximately, I would say, line
(08:58):
up with that rule of thumb of1% chance.
And if you're in business forany length of time or if you
plan on being in business forthe extent of your career, it's
not really a question of ifyou're going to get audited,
it's a question of when you'regoing to get audited.
So definitely take thisseriously.
(09:20):
It's getting in the good habits.
Once you have these good habitsestablished, it's too easy to
do.
The problem is if you get intothese bad habits and then you're
going to have to deal with allthis pain of an audit and denied
deductions and all this stuff.
So it's good to just establishthose bad habits from the
(09:41):
beginning, or from starting now,so you don't have to worry as
much moving forward.
Speaker 2 (09:48):
Yeah, absolutely.
I have helped a few clientsthrough audits and it's not
pretty.
I have helped a few clientsthrough audits and it's not
pretty.
The IRS is demanding bankstatements and if you don't
provide them, they will get yourbank to send them through a
subpoena and they willscrutinize every line.
And it's not like innocentuntil proven guilty with the IRS
(10:09):
.
If they think that you'recommingling, they're going to
assume the worst abouteverything and then they're
going to make you prove thatthese were actually business
expenses.
Unless you've got the receipts,it's going to be very, very
difficult to do so.
(10:36):
Yeah, so the third reason wedon't want to commingle is we
don't want to lose out onpotential deductions by using
personal money for businessexpenses.
So you know, you imagine youwalk into Sherwin-Williams, you
buy some roller covers, you buysome tape because they've got a
great sale going on, and maybeyou pay for it with a $100 bill
out of your pocket.
You don't think much about it,but how are you going to make
sure that those supplies areproperly deducted from your
(10:56):
business income?
Now, there are ways to do it.
You know we can do owner'scontributions, things like that,
but by default you're going tomiss out on that deduction
unless we've got a good recordof it in your business account.
So you know, one thing that wedo with our tax planning clients
(11:16):
is every quarter we're doingwhat's called an accountable
plan expense report and this isset up for those personal
expenses so that we'redocumenting them and that we are
reimbursing the business ownerfrom the corporation for those
personal expenses.
It's also a great way tocapture things that aren't
(11:39):
necessarily like cashtransactions.
So maybe you have a home officethat you're running your
company out of or you're using apersonally owned vehicle for
business.
We're going to capture thevalue of those assets and we're
going to make sure that you getreimbursed.
Now, if you don't do anaccountable plan reimbursement,
(12:00):
you're probably going to missout.
Or if you don't do them on timeand you don't do them according
to the rules, the IRS has theright to reclassify those
reimbursements as like draws ordistributions and then they're
going to disallow that deduction.
So the best course of actionmake sure you pay for everything
(12:22):
from the business account andif there is an occasional
personal use of money, yourecord that in your accountable
plan and you go through theright steps to be properly
reimbursed so that you get yourmoney tax-free out of the
company and the company gets thededuction when they file the
corporate taxes.
(12:45):
All right, number four this isone that we don't think about
too much, but it certainly couldbe a problem, and that is
business credit and loans couldbe denied.
Now why would that be the case?
Well, the bank is going to wantto look at your business
records to see if your companyis profitable enough so that
(13:07):
they can feel confident inloaning money.
And if they can't get a clearidea of what your profit is,
because there's so many personaltransactions in there, they're
not going to feel comfortableunderwriting that loan or that
line of credit.
Imagine how embarrassing itwould be to be showing your bank
(13:27):
records to the banker andyou're saying, well, you got to
take this out and you got totake that out, and that doesn't
really count.
And if you move this over here,it all looks good.
You're just kind of erodingaway their confidence in you.
How much better would you feeland more confident would you
feel if you walked in with aclean P&L, a clean balance sheet
(13:48):
, no co-mingling, and now thebank feels very confident about
giving you that line of creditthat you need.
This does happen from time totime.
Banks don't really need areason to deny a loan other than
they don't feel good about it,so we don't want to give them
anything that might accidentallyspook them.
(14:09):
The way that we can build agood relationship with the bank
and build that good will is tohave a business checking account
and a business credit card withthat bank.
They can see that you have ahistory of paying your credit
card on time, you're notoverdrawing, you're not having
(14:32):
bad checks, and they can see allof your business expenses
coming out of those businessaccounts.
Having those, you know, nice,clean, separated financials is
going to be important to them,be important to them.
(14:53):
So those are kind of the fourreasons why we do not want to
mix business and personal.
But now how do we properly payourselves out of our company?
Because obviously we're workinghard so that we can provide for
ourselves and our families.
So if we're not going to payfor personal expenses directly
out of the business, how do wetake proper owner's pay?
(15:14):
Well, it's going to depend onwhether you have a LLC that is
disregarded, so also known aslike a sole proprietorship, or
if you have corporate taxation.
If you are a disregarded LLC,aka sole proprietor, then you
are going to take owner's drawsand this is going to be a formal
(15:39):
writing of a check from thebusiness account to yourself
with owner's draw in the memo.
It's going to happen on asomewhat regular basis.
It doesn't have to be superformal but it shouldn't be
sloppy or haphazard.
Right, a $4.50 owner's draw tobuy McDonald's well, mcdonald's
(16:04):
is way more than $4.50 now,isn't it?
I'm thinking back in the 90s isway more than four and a half
bucks now, isn't it?
I'm thinking back in the 90s.
But you know I'm getting that.
You know 10 bucks here andthere to buy McDonald's is not a
good way of doing owner's draws.
Much better to have like a setmonthly amount and then you can
give yourself additional amountsbased on if you have extra
(16:25):
profit that month.
Now, if you are an S-Corp,you're going to do something
similar, but you are also andforemost going to pay yourself a
reasonable salary.
That is a formal salary ranthrough payroll, with payroll
taxes and withholding taken out,filing 941s with the IRS, taxes
(16:48):
and withholding taken out,filing 941s with the IRS, filing
paperwork with the state, andit's going to be an amount that
is commiserate to what you do inyour business, and this is a
very formal salary and it'srequired for people who have
S-Corps.
(17:12):
It is something that you don'twant to take lightly, because if
you do not pay yourself areasonable salary, the IRS is
not getting any payroll taxesand that makes them very, very
cranky and it makes them want tolook into your situation to see
what else you might not bepaying.
So I encourage my clients to beaggressive with their salaries,
and by aggressive I mean tryingto keep it very modest so that
(17:35):
you are only paying the minimumamount of payroll taxes, but
having it at a level that isdefensible and reasonable based
on what you do, and that's goingto be different depending on
where you live, how many hoursyou work in your business, what
your role is in the business.
So we do very comprehensivesalary recommendations at our
(18:03):
firm, helping people knowexactly what they can pay
themselves to minimize payrolltax, but also have a very
rock-solid, defensiblerecommendation that would stand
up to scrutiny.
Now, once you've paid yoursalary, then you would be
entitled to distributions.
We call them owner's draws anda sole prop.
We're going to call themdistributions in an S-Corp, but
(18:23):
it's the same concept a regulardistribution that's paid on a
monthly or a quarterly basis,preferably like a percentage of
the profits, and those wouldcome to you free of any kind of
payroll tax.
Speaker 1 (18:41):
Yeah, and going back to the reasonable officer salary
, it's super important to getthat salary dialed in.
We just onboard a new clienttoday actually and looking
through what he was payinghimself via salary for his
S-Corp officer salary and hepaid himself $163,000 for the
(19:03):
year, which is very high,especially considering his
business is a good size businessa little over a million, but
nothing too crazy.
But he had a very high salaryand he was just doing basic
business owner stuff, so hecould have probably had a salary
(19:23):
about $100,000 lower and savedhimself about $15,000.
So make sure you're gettingthose reasonable officer
salaries dialed in for what youactually would have to pay
someone else, like the marketrate, and getting those items
because you don't want to payyourself too high of a salary,
(19:44):
but you also don't want to payyourself too low of a salary to
make the IRS upset.
So that's an easy way you cansave big in tax there.
Speaker 2 (19:53):
Yeah, that's a great point.
I think the social securityoffice should send him like a
fruit basket or something,because he's probably been
single-handedly keeping his areafunded.
Yeah, High payroll taxes isgreat for the social security
and the Medicare.
It's not so great for you as abusiness owner.
(20:15):
So pay your fair share, but nomore than that is is the way to
do it.
Speaker 1 (20:21):
Yeah, especially with all those 190 year olds that
are out there drawing security.
Speaker 2 (20:28):
Yeah, so 90-year-olds that are out there drawing
Social Security.
Yeah, so just kind of the keytakeaways from this episode.
You know it seems like a simplething, but why do you not want
to mix business and personal?
Well, you lose your legalprotection, you put yourself at
an increased IRS audit risk, youcould be missing out on some
(20:52):
very valuable tax deductions andyou could be making it very
difficult for your company toget a loan or a line of credit
in the future.
The way you fix this is to payyourself correctly and then to
only spend your personal moneyon personal expenses.
So if anyone has any questionsabout how to do that or how an
(21:18):
accountable plan works, wherethey need help getting their
salaries dialed in, we wouldlove to hear from you.
You can go to our Facebookgroup Grow your Painting
Business, jot down your questionthere in the comments and
either Daniel or I would behappy to talk to you further
about that.
If you found this podcasthelpful, we hope that you
(21:39):
subscribe and we hope that youjoin us on the next episode.
Popular Podcasts
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com