Series: The Numbers Behind Your Business — Part 2 of 15
In the last article we met Carlos, the Hialeah contractor who saw $80,000 in the bank when only $20,000 was actually his. After reading it, Carlos decided to sit down and really look at his numbers.
He didn’t get very far.
His Home Depot receipts were scattered between the truck’s glove box, a desk drawer, and a plastic bag in the closet. Some had faded in the heat. Others never existed, because he paid with his personal card and didn’t ask for one. And when he opened the business bank statement, he found everything: materials, payroll, groceries, Netflix, insurance on his wife’s SUV, and a birthday dinner.
Carlos has what accountants call a shoebox and a mixed account. And it’s far more common than you’d think.
The shoebox problem: lost deductions
Every business expense you can prove lowers your taxes. Every expense you can’t prove might as well never have happened.
When Carlos and his accountant went through the year, they found about $18,000 in materials and tools that Carlos really did buy for his jobs, but had no proof of. He paid cash, used his personal card, or simply lost the paper.
What does that cost him? Because Carlos has a single-member LLC, he pays federal income tax plus self-employment tax, which is Social Security and Medicare for the self-employed. Together, in his case, they take roughly 38% of every dollar of profit. Florida has no state income tax, but those $18,000 without receipts still cost him about $6,900 in extra taxes.
Not because the expense wasn’t real, but because he couldn’t prove it.
The mixed-account problem: three hidden risks
Paying personal bills from the business account (or the other way around) seems harmless. “It’s all mine anyway,” Carlos thinks. But it has three serious consequences.
1. Your numbers stop telling the truth. If groceries show up as a business expense, the business looks less profitable than it is. If you paid for materials with your personal card, it looks more profitable. No report from that account can help you make decisions.
2. You put your LLC’s protection at risk. One reason to have an LLC is to keep your personal assets separate from the business’s debts. But if you and the business use the same money in practice, a judge may decide there’s no real separation. In a lawsuit, that can expose your home and savings.
3. In an audit, everything becomes suspect. When the IRS sees an account with personal and business expenses mixed together, it’s on you to prove which is which. If you can’t, the deduction is usually denied, and it can come with a 20% penalty on the tax that went unpaid.
The family SUV
The case that surprised Carlos most was the vehicle.
His wife has an SUV she uses to take the kids to school. But Carlos also uses it some days to visit clients and give estimates. Since it’s “for the business,” the monthly payment, insurance, and gas come out of the company account.
The problem is that vehicles are among the expenses the IRS scrutinizes most. To deduct vehicle use, the law requires a mileage log: the date, where you went, why, and how many miles. Without that log, the IRS can deny the entire deduction, even when it’s obvious the vehicle was used for business. And even with a log, you can only deduct the business-use percentage, not 100%.
Carlos had never kept a mileage log. That changed his plans.
What’s actually deductible?
A simple rule: an expense is deductible if it’s ordinary and necessary for your kind of business, and if you can prove it. For a contractor like Carlos, that includes things like:
Materials, tools, and equipment for jobs
Payroll, payroll taxes, and payments to subcontractors
Liability insurance, licenses, and permits
Business use of a vehicle, backed by a mileage log
Phone, software, and professional services, for the business portion
And what isn’t deductible, even if it comes out of the business account: household groceries, the family’s streaming services, everyday clothing, and personal expenses in general.
How to get out of the shoebox
You don’t need a complicated system. These three steps solve 90% of the problem:
One bank account and one card just for the business. Everything for the business goes through them, and nothing personal does. If you need money for yourself, transfer it (an owner’s draw) so it’s on record.
Snap a photo of the receipt on the spot. Any accounting app, or even a folder on your phone, works. A photo taken in the Home Depot parking lot is worth more than the paper lost in the glove box.
A mileage log. There are apps that track it automatically with your phone’s GPS. Five seconds a day can save you thousands.
And keep those records. The IRS can generally review the last three years, and in some cases longer.
So what now?
Carlos didn’t lose that $6,900 by doing something wrong. He lost it by not having a system. And that’s the good news: it’s a fixable problem.
When accounts are separate and expenses are recorded every month, every dollar lands in the right place. And then you can finally pull reports that tell the truth.
Next in the series: With his accounts in order, Carlos will see, for the first time, the three reports that tell the story of his business. We’ll explain them without the jargon.
Do your books look like Carlos’s? At Gosnor, we help you separate, organize, and keep your books current, so you never lose a deduction. Book a free consultation.
Lee este artículo en español: La caja de zapatos y la cuenta mezclada: lo que te cuesta no tener tus cuentas en orden
