Getting paid as a business owner is rewarding, but after you celebrate those hard-won sales, you may have this question: Where should that money go?
Can you put it in your personal checking account? Do you need to have a separate business checking account? What are the rules?
Keeping your personal and business finances separate is a smart idea to maintain accurate records, understand your business’ financial health, and make informed decisions. Even further, those separate accounts might not just be a recommendation—depending on your business, they could be a requirement.
What’s the difference between business and personal checking accounts?
A business checking account helps business owners hold and manage money made within a company. Personal checking accounts help individuals hold and manage their personal funds. Some of the main differences include:
- Business bank accounts have more legal protections than personal bank accounts, meaning you won’t be offered protection from business liabilities when using a personal checking account for business expenses.
- Business bank accounts can do a better job at solidifying your brand.
- Personal bank accounts and business bank accounts have a different fee structure.
Folks who operate under a DBA (doing business as) name, an LLC, or a corporation might want to consider opening a business checking account that’s separate from your personal checking account.
Here are a few key factors of a business banking account:
- Includes a business checking account
- Allows you to make payments from the account, transfer money electronically, and use a business debit card
- Helps you separate savings from working capital
- May require a minimum deposit and/or balance requirements and monthly fees
On the other hand, personal checking accounts are intended for personal funds.
Personal fund activities include:
- Depositing paychecks from an employer
- Paying personal expenses including mortgage and phone bills
- Debit card purchases
- Transferring funds to personal savings accounts
- Withdrawing money from an ATM
- Gifts and personal payments to friends, family, and acquaintances
Why should I consider a business bank account?
When it comes to business checking vs. personal checking, opening a dedicated business bank account can help you:
- Safeguard your business funds by separating your personal finances
- Easily monitor your business spending
- Create more realistic budgets
- Practice better bookkeeping habits that keep your business finances organized
- Help you get a business loan, line of credit, or a business credit card when you need one
In short, even if a separate account isn’t required for your business, it’s still a good idea to get one. We’ll explore these benefits in depth below.
Can I use the same bank for personal and business banking?
Yes! When choosing a bank for your business bank account, many people start with financial institutions they know and like. If you have a personal bank account in good standing, you may get a better offer on a business bank account at the same bank.
Many banking institutions that offer consumer or personal bank accounts also offer business banking services. However, reviewing the specific features of a business bank account is always a good idea before you sign up.
Some business banking service providers may offer account features specifically tailored to small businesses.
Business checking account benefits
It makes sense for business owners to separate their checking accounts for business and personal use. Here are a few business checking account benefits that you should consider.
Accurate accounting
When you open a business checking account, you are able to keep closer tabs on your cash flow. When you blend the two accounts, it’s common to get confused with funds moving in and out frequently. Separating your business transactions will also reduce the stress of your bookkeeper, resulting in more accurate accounting.
Streamlined tax reporting
You can take the hassle out of tax reporting when you have a separate business checking account. Save the headache of sifting through all your transactions to decipher which are personal or business expenses. With an unconnected checking account, you will have a built-in record of all company spending.
Asset protection
Dividing your business and personal spending into two accounts can protect your assets from potential debt or fraud. If you blend the two into one account, a court could go after your personal funds if you run into legal issues with your business.
Business vs. hobby legitimacy
The IRS requires you to report all income, but a combined checking account could falsely categorize your company as a hobby instead of a legitimate business. Keeping your funds separate and providing a paper trail of business transactions would help prove you are running a fully-functioning company.
Enhances your professional brand
Your image and reputation are critical as a business owner. For example, your clients may see you as a more established business if payments go directly to a business checking account vs. a personal account. By opening a business checking vs. personal checking account, you could also expand your line of credit or chances of taking out a small business loan in the future due to establishing trust.
Business checking account factors to consider
Deciding which business checking account is best for you is a big decision. As a business owner, you will want to look at the key features of both types of bank accounts. Here are some things you should consider:
- Fees: Most business banking accounts have monthly and annual fees. Make sure to look for one that waives or reduces the monthly fees if you maintain a certain amount. Fees, on average, are $10–$20 monthly but could be more expensive.
- Minimum deposit and balance requirement: Some business banking accounts require a minimum opening deposit amount and maintaining a certain balance. It’s best to find an account that doesn’t require a large deposit or high balance requirement.
- Interest rates: The highest interest often provides the highest return on investment, but it shouldn’t be the only priority when choosing a checking account. Most accounts with high interest rates also come with increased monthly fees that could cancel out your earning potential.
- Transaction limits: Certain banking accounts restrict the number of deposits and withdrawals you can make each month.
- Employee debit cards: You can give your employees limited access to your business banking account for company purchases. However, not all banks offer this perk. It would be beneficial to choose a business banking account that offers employee debit cards.
- Online services: With new technology on the rise, certain banks offer online services. Manage your funds and get all your banking down in the comfort of your home or office. However, not all online banks have physical branches in every town, so make sure to check to see if your business bank has a location nearby.
- Sign-up bonuses: While sign up bonuses aren’t standard at most banks, certain business banking accounts will offer new customers cash bonuses for signing up, making a certain deposit, and maintaining a specific balance.
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What do you need to open a business bank account?
One of the biggest differences between personal vs. business banking accounts is the application process and requirements.
Nearly everyone can open a personal banking account, but to open a business banking account you will need the following:
- State-issued ID
- Social Security number or employer identification number (EIN)
- Business license
- Articles of Organization for LLCs
- Articles of incorporation for corporations
Keep in mind that the exact documentation required will vary depending on the bank you are applying to and your overall legal structure. Sole proprietors typically use their own personal information, while corporations and LLCs need to provide more business-related documentation in addition to personal information.
Business banking account FAQ
Still not sure about the ins and outs of business checking vs personal checking accounts? Check out some frequently asked questions to ramp up your understanding of these bank accounts.
Can I use my personal account for business expenses or my business account for personal expenses?
No, it’s not recommended that you use your personal bank account for business purposes. Nor should you use your business account for personal expenses. Separating your business and personal financials may help you avoid legal issues or problems with recordkeeping.
Can I use my personal checking account if I own a corporation or LLC?
No, if you’re registered as an LLC or corporation, a separate bank account for business finances may help protect you legally. It’s a good idea to open a bank account under your business name as soon as you start handling business transactions.
Can I use my personal bank account as a sole proprietor?
You’re not required to have a separate business bank account as a sole proprietorship, but separate accounts are still a good idea. A dedicated business account can help you separate business and personal expenses and manage your business finances more easily.
Do you need business revenue to open a business checking account?
No, you do not need to earn money or show proof of a profit before you open a business checking account. Opening a separate bank account for your business should be one of the first steps you take as soon as you start your company.
However, keep in mind that some business checking vs. personal checking accounts require a minimum deposit amount when you sign up. Make sure you read the terms and conditions before opening your business account.
Are business checking accounts FDIC insured?
Folks that aren’t sure whether to choose a business checking vs. personal checking account should know the Federal Deposit Insurance Corporation (FDIC) protects personal deposit accounts up to $250,000 per account. Business checking accounts can receive the same amount of protection.
The FDIC protects the following items:
- Checking accounts
- Savings accounts
- Negotiable Order of Withdrawal accounts
- Money market deposits
- Certificates of deposit (CDs)
- Money orders
- Cashier checks
- Other official bank-issued items
Keep in mind that the FDIC protections do not apply to investments, safe deposit boxes, annuities, or life insurance policies. However, you do have the reassurance that your funds are covered up to the applicable amount.
Final thoughts
While personal checking accounts are great for storing your funds, opening a separate account for business expenses could serve a larger purpose. Business banking accounts allow you to legitimize your company, streamline bookkeeping, and protect your assets. Making the switch could greatly enhance your overall business.
This content is for information purposes only and information provided should not be considered legal, accounting or tax advice or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does it have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. cannot warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.
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This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
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Home businesses tax deductions to take as a small business owner
Small business owners take on a considerable amount of responsibility. Beyond serving clients, they must also take care of all the minutiae of running a business, including keeping track of expenses they can deduct as a small business owner.
Fortunately, small business owners and entrepreneurs who use their home for work can benefit from various home business tax deductions that help them reduce their taxable business income. Common deductions include office supplies, software and internet access, but deductions can vary widely depending on the type of home business you run.
- Who qualifies for home business tax deductions?
- 25 home business tax deductions for your small business
- How to write off home business expenses
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If you run your business out of your home, you may be able to deduct expenses for the use of your residence on your taxes for your small business. The home office deduction can be utilized by homeowners and renters, and any type of residence can qualify (single-family home, condominium, manufactured housing, etc.).
To qualify for the home office deduction, your home business activities must meet the following criteria:
- Regular and exclusive use. According to the IRS, you must “regularly use part of your home exclusively for conducting business.” In other words, you must have a space in your home that you use only for business purposes, such as a home office or extra room that is used only for business and never for personal use.
- Principal place of business. To qualify for the home office deduction, your home also must be the principal place your business operates from, although there are exceptions. The IRS reported that you may qualify for the home office deduction if you also have a business location outside of your home, provided you use your home for a substantial component of your business. For instance, if you conduct business in another location but have meetings with clients or patients in your home, the IRS allows you to deduct expenses for the part of your home that you use “exclusively and regularly” for business purposes.
There are some exceptions to these rules, including for those who run a home daycare. If your small business involves watching children in your home, then it would be impossible to meet the “exclusive use” criteria if you’re watching children in your own living area. To qualify for this exception to the exclusive use rule, you must provide daycare for children, persons age 65 or older or persons who are unable to care for themselves. Additionally, you must have “applied for, been granted or be exempt from having a license, certification, registration or approval as a daycare center or as a family or group daycare home under state law,” noted the IRS.
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If you’re eager to reduce your taxable income this year, figuring out which home business tax deductions you can take is a smart first step. Here are 25 common deductions you may be able to qualify for.
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Business supplies and office expenses, such as office furniture, printer paper, pens, calculators and business cards, are deductible provided they are for business use. According to the IRS, business expenses must be both ordinary and necessary, meaning they are “common and accepted in your trade” and “helpful and appropriate,” though not necessarily indispensable.
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Small business computers and software you need to purchase for your business, including small business accounting software, should be tax-deductible business expenses provided these purchases are ordinary and necessary for your business to remain in operation.
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You may also be able to deduct home repairs and maintenance performed on your place of residence, but only for the part of your residence that is used exclusively for business purposes. According to the IRS, an example could include “painting or repairs only in the area used for business,” like a new coat of paint or replacement flooring in your home office.
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You can deduct the business portion of your rent as an expense if the property you rent is for use in your trade or business. However, you cannot deduct rent as a business expense if you have or will receive equity in or a title to said property. Per the IRS, rent is defined as “any amount you pay for the use of property you do not own.”
In terms of depreciation, the IRS said that you can typically deduct depreciation on the business use portion of your home as well, in an amount up to the gross income limitation over a 39-year period.
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If you have a home office, your house utilities will also be required for your business. As a result, you can deduct a portion of your utility bills, such as gas and electric bills. However, you can only deduct a portion of these expenses since, obviously, part of your utility bills are for personal use.
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If you use your car for business purposes, you can deduct auto-related expenses for the business use of a car. The IRS also reported that, if you use your car for both personal and business use, you must divide your car expenses based on the mileage you drive for personal and business purposes.
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You can also deduct mileage for all travel related to business. The IRS offers a table of standard mileage rates and mileage deduction rules you can refer to for the last several years, including mileage expenses for 2020.
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You can also write off employees’ pay as a small business owner. This is true even if you operate your business out of a home office.
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You can also deduct contributions to retirement plans, including tax-advantaged retirement plans for the self-employed or small business owners, such as an SEP IRA or a solo 401(k).
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If your business is paying interest on a credit card or loan that you borrowed for business activities, you should also be able to deduct this interest as a business expense.
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According to the IRS, you may be able to deduct various federal, state, local or foreign taxes that are directly related to your trade or business.
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You can typically deduct the cost of business-related insurance products you pay for, provided they are applicable to your trade or profession.
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If your business creates products or purchases them for resale, you can typically deduct the cost of these products or the costs involved in manufacturing them. This can include the cost of raw materials, freight, shipping, storage, direct labor and more.
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Thanks to the Tax Cuts and Jobs Act of 2017, you may be able to deduct up to 20% of your qualified business income on your taxes. This deduction does have limitations based on your trade or business as well as how much you earn, however. Specifically, joint tax filers with incomes below $315,000 and other filers with incomes below $157,000 can claim this deduction in full provided they work in a qualifying industry. For 2018, joint tax filers with incomes between $315,000 and $415,000 and individuals with incomes between $157,000 and $207,500 were subject to phase-outs.
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If you use your home for business purposes, you can generally deduct cleaning services and supplies that you purchase for the business-related portion of your home.
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If you own your home and have a home mortgage, you can deduct a portion of your mortgage interest on your business taxes. Deductions are based on the percentage of your home that you use for your business. If your lender requires mortgage insurance, part of that can be deducted as well.
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Business-related travel expenses can also be taken as a business expense. This could include travel to meet with clients or to professional education or training events.
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If you pay for professional services, such as legal advice or tax preparation, these expenses can be deducted as business expenses.
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If you pay for marketing help or a business coach, these expenses can be deductible from your business income.
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If you ship items for business purposes, shipping costs can be deductible on your taxes. The same is true for postage when used for business purposes.
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A security system that protects the doors and windows in your home from intruders can also be partially deductible as a business expense, provided part of your home is used for business purposes.
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Professional memberships you pay for and subscriptions to business-related publications can also be tax-deductible.
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The IRS said that while the first local telephone landline in your home is not a deductible business expense, “charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses.”
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Health insurance for yourself and your family is deductible as a business expense when you’re self-employed, although you do not have to have a home office to qualify for this deduction.
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If you pay for or reimburse education expenses for an employee, you can deduct the expenses if they are part of a qualified educational assistance program, per IRS rules.
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If you’re feeling overwhelmed by all of the home office business expenses you might have to keep track of, you should know that the IRS also offers a standardized home office deduction that requires less legwork upfront. Here are the two options you have when it comes to how to write off home office business expenses this year:
- Simplified home office deduction: Since the 2013 tax year, taxpayers have been able to access a simplified option for computing the home office deduction. This option lets you determine a standard deduction based on the square footage of your home office space, thus letting you avoid tracking and reporting all of your individual home office expenses. Of course, the simplified method isn’t perfect since you can’t take some deductions like depreciation. You also cannot carry over a loss from a previous year, which is a departure from the regular method.
- Regular method: If you keep excellent records and prefer to deduct business expenses the old-fashioned way, you are still able to do so. With this method, you would need to keep detailed records of all your actual expenses for your home office including mortgage interest, utilities, depreciation and more. From there, your deduction will still be determined based on the percentage of your home used for business purposes.
If you’re using the regular method, you should plan on using IRS Form 8829 for certain business-related tax deductions when you file your taxes. But be aware that some business expenses don’t fall under the home office deduction, so they would be deductible within other areas of your taxes, such as Schedule C or F. Examples include telephone expenses, dues and salaries.
Also note that if you use the simplified method and itemize deductions, you can deduct some expenses for your home that are otherwise deductible, including mortgage interest and property taxes, as itemized deductions using Form 1040 or 1040-SR, Schedule A.
When choosing which method to use for your home office deduction, keep in mind that both options have pros and cons. The regular method requires a lot more work, but you have the potential for a larger deduction if you have a lot of qualified expenses within a year. The simplified method is easier, but not necessarily ideal if you want to recapture depreciation when you sell your home, or if you want to be able to carry over losses. Make sure you understand each method and its limitations so you can make an informed decision.
This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.
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