Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive
Dear To Her Credit,
I am a sole proprietor. Other than for the obvious reason of
organizing expenses, is it mandatory for tax reasons that I use separate
accounts for personal and business use of credit cards and bank accounts? I ask
because I was recently advised to use my corporate card for all of my expenses
-- both business and personal -- as part of a strategy for keeping my personal
credit score high. The reasoning is that since corporate cards are not reported
on personal credit reports, my personal credit card "utilization"
remains low. In other words, I am not constantly maxing out my cards and
damaging my credit score.
It is also important to know that my business is currently
in my own name -- I have not incorporated yet. If I have a corporate card in my
own name, won't that still go toward my personal credit? -- Sarah
Your intuition is correct. As a sole proprietor, your
business card will affect your personal credit score. That only makes sense,
because you and you alone are responsible for the account.
Putting all your debts on your business cards, even though
they are owned by you, is similar to the idea some people have of keeping all
their troubled or maxed-out credit accounts in one spouse's name and the good
accounts in the other's. They may think they are gaming the system, but
eventually they wish they'd spent more time keeping both credit histories in
good standing instead of shuffling debt from one to another.
As a sole proprietor, there's even less point in moving
debts and other things reportable on your credit account between personal and business. As far as creditors are concerned, you are the business. In fact, putting
all your expenses on one business card and pushing it close to the limit could
hurt your credit score.
There are two reasons you should keep personal and business
accounts separate and use them for their intended purposes:
First, having separate business accounts is one way to
demonstrate to the IRS that you are a serious businessperson. This is
especially important if there's any chance the IRS could decide you have a
hobby, not a business, and they disallow some of your deductions.
Second, keeping personal and business accounts separate simplifies
tracking business expenses. Most people lose deductible expenses not because they
didn't know they could take the deduction, but because they weren't organized
and lost track of the deductible expense altogether. If you only put business
expenses on your business card, it should be a cinch to categorize them and get
all the deductions you have coming.
If you haven't always kept expenses on separate cards, or if
some expenses have crossed over from personal to business or vice versa, don't
worry. Keeping separate accounts is highly recommended, but not mandatory. As long
as you track your business transactions and what they were for, you can still
deduct them. One way to do that is to go through your statements every month
with a highlighting pen and mark all your business expenses. Use a different
color for other tax deductible items, such as charitable contributions you made
on your credit card. Make notes for anything that is not self-explanatory, and
then it's easy for you or your accountant to categorize expenses correctly so
you can get an accurate picture of how your business is doing and pay no more taxes
than you rightly owe.
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