Two different businesses from home - husband and wife

"Teak" wrote

You each should have separate checking accounts for each business and at least one other joint account for personal non-business income to be deposited into and personal expenses to be paid from.

At the end of the year you can pull the household expenses that relate to the "home office" deductions from the joint personal account, leaving the rest of the business accounting to be culled from each business checkbook.

Right.

How important is this? My wife and I each run a business, reported on Schedule C, but neight of us has ever had a business checking account. We each maintain books that contain business revenues and expenses, but we only have one personal, joint, checking account and no other checking accounts.

Is this problematical?

Steve

Separating business & personal accounts is vitally important. Where you are self-employed, whether a small "side business", your primary source of living or anything in between, you should always have separate accounts used exclusively for business purposes which separate your business and personal finances. The risk of comingling business & personal assets/funds is that the IRS will take the position that the expenditures are personal, not business. While the burden of proof is always on the taxpayer, comingling asset significantly increase the burden of proving business vs. personal expenditures.

Thank you.

Is this opinion backed up by experience from IRS examinations? Say, if one client has a business checking account, and another does not, and they both have adequate expense records otherwise (receipts, contemporaneous records describing business purpose, etc.), the second client loses out in the examination more than the first?

I'm very curious to know if this is an actual as opposed to a theoretical concern. I write about three business-purpose checks per year on our personal checking account and my wife writes none. In addition health insurance is deducted from this account. Am I exposed? It would be quite a hassle to set up two new bank accounts that we don't really need and would barely use, transfer money into them, etc.

Steve

Your writing 3 business-purpose checks a year from an otherwise personal is very different from what I was getting at above. My point is that you do not want to comingle business & personal deposits & expenditures in your *business* accounts.

The basic rule for maintaining "adequate books & records" comes from Reg Sec 1.6001-1. However, that Reg Section does not define what adequate books and records are. While the burden of proof is virtually always on the taxpayer, you make it much more difficult for yourself where you do not segregate your business and personal finances. Again, this is in the context of running a business, not running the occasional business-purpose check through your personal checking account. There is case law on this although I cannot provide any cites off the top of my head. An indication of the IRS's view of this which was supported in court (Tax Court I believe) has to do w/ cell phone usage. Taxpayer had a celluar plan with lots of minute used primarily for business purposes. Made occasional personal calls. Entire deduction was disallowed becuase the Court accepted the IRS's argument that given the plan, the business use didn't create "incremental additional expense" to the taxpayer, whereas the taxpayer's argument was that he needed a large number of monthly minutes because of heavy business use and that the occasional personal call didn't incur any incremental charges and should be ignored. As you probably know, cell phones are "listed property" and as such, all usage must be diligently tracked and usage allocated between business and personal or the entire deduction is at risk. Congress was supposed to be working on an update to this but they're distracted trying to see how much more damage they can do to the economy at the moment.

San Diego CPA replies to my post,

Right, that makes sense. i.e. if TP did have a business checking account, deducted all spending from it, but had no records of what it was for, that is obviuosly not good. I was more concerned about generalized statments made earlier that one

*should*, for compliance, have a separate business checking account, and I'm thinking that this must depend upon circumstances.

I understand the listed property issues. Thanks.

Steve

in article jztxl.15124$ snipped-for-privacy@flpi146.ffdc.sbc.com, San Diego CPA at snipped-for-privacy@sbcglobal.net wrote on 3/22/09 6:27 PM:

I keep detailed records of everything in Quicken for both my wife and I and our 2 businesses. I use the class feature to distinguish each business and personal. Every income and expense item has a class of CPA or Teaching. Personal has no class designation. At any moment in time, I can pull an income and expense statement for either business by class. I do the same thing with every credit card transaction. If I go to the store and buy office supplies and groceries on the same charge, I mark up the receipt and have two sub category entries for the purchases, one personal and one CPA. If I buy a case of copy paper, I make 3 entries and allocate 1/3 to each business and 1/3 to personal.

Every deposit that goes into the checking account is identified in the same way, by class. We copy the checks onto the invoices and deposit them one at a time so they are individually identifiable. Deposit slips form the ATMS are stapled to the invoice and check copy. We seldom have cash receipts but if we do, we copy the bills showing serial number and write the client and date received. That goes into the file with the checks. We do not keep separate bank accounts or credit cards but we have meticulous records backed up by well organized receipts. I have never felt uncomfortable with this arrangement but I have also never had a client who records and tracks as meticulously as I do. The less organized you are, the more you need separate accounts.

Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA Cincinnati, OH USA

[Importance of separate checking accounts]

Thanks for this description.

We do something that is, I think, just as complete but does not involve Quicken or other software. Instead it is all on paper. For receipts, we keep a (paper) contemporaneous receipt log for each of the two businesses. This shows amount, date received, invoice number, customer, check number and check date. But we do not deposit each check separately (I usually do, but my wife gets many checks per month and deposits them in rouhgly monthly batches).

Schedule C expenses each have a one-page "expense report form", also prepared contemporaneously, to which is stapled the credit card receipt, cash receipt, or rarely, contains a reference to the check number if paid by check. This form states date, business purpose, etc. and goes into a file folder labeled "expenses".

The joint, personal checking account itself is not part of the recordkeeping of the businesses, since revenue and expenses are completely recorded elsewhere per the above.

We've never been examined; our EA considers us "detail oriented" and seems very comfortable with the eventuality of an examination.

Steve