Indies, an alert: Be careful. Know your source.
Sammy Segar, CPA, is the composite figure I use in my writings to depict the tax pro who totally misunderstands indie life; my recent blogpost, You Do Not Need A Business Checking Account, woke the real Sammy Segars out of their after-lunch naps.
Last Friday The Wandering Tax Pro, Robert D. Flach took respectful disagreement with my post in his You Do Need A Business Checking Account.
Flach advocates a separate business checking account because an indie should “do as much as possible to give your self-employment activity the appearance of a real business entity so that the IRS does not come back and say that it is really a ‘hobby.’” But then he steps on his own message by citing the chronic problem of indies with business checking accounts – what to do when the money gets low. Well, he says, “loan” money to the business account from your personal account and then return it later. If you have attended my seminars or read my book you know: That leaves a very wiggly audit trail for the IRS to follow.
He quotes my observation that in an IRS publication “you are urged to open a business checking account.” But he fails to include the rest of the comment, which was my main point: “The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.”
Flach says: “a separate business checking account is not a strict requirement.” I am not sure how a “strict requirement” differs from a plain requirement but the IRS didn’t require – it “urged,” which is no requirement at all.
Mr. Flach’s website does indicate that he works with self-employeds. He offers information to the “sole proprietor and one-man LLC.“ Well, if we were still in the 20th century I could understand, but this is the 21st. One-man!
Another response to my post came from The Tax Lawyer's Blog . Let’s call him Attila Attorney.“ In a recent post,” he writes in astonishment, “she advises her business clients to commingle their business funds with their personal funds. You read that write. She advises the commingling of funds.” Yes, indies, you read that right. He did say “write.”
Then he warns: In advising that an indie doesn’t need a separate checking account I am “engaging in the unlicensed practice of law and it’s dangerous.” I’m not sure if he means dangerous to me or to you indies. I didn’t realize that advising against setting up a business checking account was fraught with such peril.
Oh -- and I was not going to mention this but I just had to. He says: “First, Ms Walker may be the most brilliant, competent, well-meaning person on the face of the planet …” Well, my mother and my husband always thought so and I’m pleased to know that A. Attorney, Esq., is considering the possibility.
He follows that with, “Second, and more importantly (his seventh grade teacher would have corrected that to “important”), Ms. Walker is giving business owners horribly bad advice.” (Oh, wait. Maybe I shouldn't correct his grammar because I'm not a licensed teacher.)
He has warned of danger and spoken of horror. But should we be getting goose-bumps and feeling our hair standing on end? Not really, because there is nothing illegal, immoral, fattening or unwise for a sole proprietor, who is not an LLC, to conduct business by depositing income or paying for business expenses from a personal checking account. For that matter, for reasons explained on my website and blog, it’s smart.
Attila Attorney then abruptly changes the subject to the protections that await the indie who does exactly what the lawyers want him to do – form a corporation.
He warns indies – likely in his thinking they are all corporate monarchs -- against “a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation.” Well, duh! That would be a serious mistake.
But can Attila keep his attention span focused long enough to note that my blogpost never mentioned corporations? Did I advise: Don’t set up a separate checking account, even if you form a corporation? Of course not. Whatever his motive for changing the subject, it gives him a chance to plug incorporation – a legal step near and dear to the hearts of many lawyers.
And when Jeff Day, an enrolled agent, in a comment to the post disagrees with Attila the Tax Lawyer, Attila responds to Jeff with: “If you have a serious business, it’s unwise to operate as a sole proprietorship and probably malpractice for a lawyer not to point that out to his clients.”
I’m trying to think of a word that properly describes his assertion that advising against a business checking account is practicing law without a license or not advising to incorporate is “malpractice.” “Preposterous” somehow doesn’t seem strong enough.
Of course, the issue we should be looking at today isn’t practicing law without a license or malpractice or man-only businesses. It’s Attila and Sammy giving tax and legal advice to self-employed independent professionals without really understanding how indie businesses function.
June Walker
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8 comments:
JW-
Ah, another debate among tax professionals!
Why can’t we learn to just get along?
I agree with your post’s title – “There’s no shortage of bad advice out there” – however we disagree on who is actually providing the bad advice.
First of all, sorry for not being perfectly “PC”. This is a legitimate complaint. I do try to use “he/she” etc instead of he in my posts.
Secondly I take exception to being compared to “the tax pro who totally misunderstands indie life” simply because I disagree with you on one issue. I have been preparing 1040s for “indies” since 1972, a bit longer than you, and have been an “indie” myself most of the past 38 years.
Now on to your comments on my comments -
You say - “Well, he says, “loan” money to the business account from your personal account and then return it later. If you have attended my seminars or read my book you know: That leaves a very wiggly audit trail for the IRS to follow.”
It would seem to me that using one’s personal checking account for both business and personal expenses is more wiggly an audit trail for an IRS auditor to deal with.
You then quote your original post - “The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.”
What a silly example. What fool would give a gas station attendant his/her check to pay for a gas purchase? Do you know of any gas station that would accept a check? If the business person uses the Standard Mileage Allowance he/she would just reimburse himself/herself from the business checking account for the appropriate business mileage. If the actual expense method were chosen the business portion of total auto expenses would be either reimbursed.
One would expect you to use the usual courtesy of “Mr” in front of Flach when discussing me. You mention that I “took respectful disagreement” to your post. One would expect you to provide the same respect.
Rather than merely “pooh-poohing” me as one who does not understand “indies” just because we disagree I would prefer a serious discussion on the issue. You could, perhaps, explain why if you do not agree with my statement that an indie should “do as much as possible to give your self-employment activity the appearance of a real business entity so that the IRS does not come back and say that it is really a ‘hobby.’”
Regarding your other opponent - I am not a fan of Mr Pappas, and have myself felt his wrath, similar to your wrath, when I made the mistake of disagreeing with him. I would agree with your reference to him as “Attila the Tax Lawyer”. It appears that he does not know how to express “respectful disagreement”.
To be fair I do not believe you advised corporate officers to pay business expenses with a personal check. I took your post to be concerned with self-employed individuals, LLCs or not, who file a Schedule C.
I totally disagree with his statement – ““If you have a serious business, it’s unwise to operate as a sole proprietorship and probably malpractice for a lawyer not to point that out to his clients.” Lawyers in general like to tout corporations because of the additional legal fees involved in forming and maintaining a corporation.
Let me know when you want to conduct a serious and respectful discussion on this topic.
TWTP
Well written post.
I'd tip my hat, but you criticize grammar when there isn't anyone who blogs about tax stuff that doesn't get in a hurry in the heat of writing and make a typo or grammar error. Yours included. Yet, I really can’t say much for I am surely the worst, as my retired English teacher Grandmother would quickly point out.
As to the overall suggestion to have a second checking account or not, I say this. No, it isn’t necessary for the sole proprietor to have a separate account. Yet it is a good accounting practice to advise both sides.
Both sides?
Well, the on one side, not having the second account, you covered very well in your post “You Do Not Need A Business Checking Account” and on the other side it makes bookkeeping easier, especially when your trying to figure out how things are going. No you don’t need it, but having it (depending on where you bank) has no cost, affords easier accountability, and as pointed out helps when your customers pay you to write the check to biz name instead of “across the table”.
So I assume as you advise you clients there is no need for a second account, but you do also adviser them of the benefits.
Again, well written post.
Attila Attorney - thats very good.
I must say I am disappointed with your dismissal of tax professionals who have chosen to disagree with you.
As to the business checking account issue, I always have and will continue to recommend separate business and personal accounts. Why? Based on 21 years of tax return preparation (and 2 having micro businesses) my experience has taught me...
While good documentation of business expenses from a personal account may help in an audit, I would never want to convince an IRS agent that flowers for my mom were a business expense even if they were.
It's too easy to spend the business money for personal bills and not have to money to take care of their business bills. Or the reverse. If you use only one account, you still have to keep track of how much you can spend for business and personal.
Hobby vs Business classifications are easier if the owner is acting like it is a business and takes on the responsibility of a business account.
It's really cheaper. My business account is free most of the time and even if it wasn't a few bucks a month is much cheaper than paying the tax professional to clean up someone's personal/business account to do taxes. I can't think of a client with a merged account who didn't need me to spend extra time (and charge more) to audit their account for legitimate expenses. If you want to buy the kids' school supplies and copy paper and toner for the business together from one account. Be prepared to pay me to separate them and pro-rate the tax. Much cheaper to separate them and pay for them separately from different accounts.
I am sure I can come up with other reasons but this should get my point across.
Trish
PS- I hope I left you some spelling and grammar mistakes to belittle me with.
There is more than one context to the question about whether a separate account for a business is a good idea or not.
One context that would argue in favor of it is that putting business records off by themselves improves privacy.
Let's say you want to sell a business. The buyer wants to do some due diligence and make sure that the thing she/he is getting is really what you represent it to be. They are going to ask to look at the records, and probably the bank records too. If those records include personal activity you will likely hesitate or hedge. The planning for selling a business should be done at least three years before the expected sale.
It's similar to a question asked here recently about whether to make the election out of subchapter K for an LLC owning rental property. To preserve privacy when a bank asks for a copy of the tax return, the client chose to leave the rental activities on a separate tax return.
I would personally tend towards keeping things separate since that is what I was taught in school, but there are several things to consider in the decision.
A Missouri CPA
OMG -I can't believe what I am reading. Is this how tax bloggers behave?
First, let me just say that the idea of advising a client that they don't "need" a business checking account is ludicrous (in my opinion). Frankly, some clients just don't need to know about the things they don't need to do. LOL. Besides, not all the things we advice are clients are required by "code" tax or otherwise. For example, I advise my self-employed clients to have health insurance. It's not required, but heck it’s a good idea.
However, that’s not why I felt the need to join this discussion. Frankly, your ad hominem attach on a blogger for his grammar and spelling errors, is the epitome of "chick think." It reminds me of a frustrated wife who lacks the skills to produce a valid argument so then attacks her husband's manhood, a topic completely unrelated to the discussion.
Maybe this was your intention - or maybe not.
However, your comments completely take from the substance of the argument and frankly invalidate your credibility since the ad hominem attack is generally used when one is unable to find fault with the original argument.
I admit, I was offended and put off by your comments. You might want to rethink that for next time.
Why in the world would you say that loaning money to the biz from personal funds creates an IRS auditing issue and then feel it's ok to comingle biz and personal funds? Loaning money in to the biz should happen fairly infrequently. We tend to spend money for either biz or personal a bit more frequently.
If my client doesn't leave sufficient working capital in the business and has to loan money in, that's a problem that we need to address well before tax time. I WANT them to call when this happens. It is relatively easy for them to understand that this event means that they have an issue with profit and/or working capital. Imagine having that conversation with someone who is doing some independent contractor work with a view to starting their own gig while they drop their wages into the same bank account.
For listed property like vehicle expenses you have the professional duty to explain the options to the client and determine what would work best form them and their business. We ought to help them set up policies and procedures that match whatever program they decide to use. This isn't simple and it doesn't get simpler just because you jammed all of the transactions through one bank account.
I have NEVER in 20 years seen a client who used one account for biz and personal activity set up a decent accounting system. I don't want to wade through my client's checkbook and figure out if they have a profit problem or a lifestyle issue. I don't want to sit while they ponder whether the Panera trip on Monday was a biz expense or was it Tuesdays Macaroni Grill trip?
Would you give this advice if revenue includes collecting sales tax from customers? The answer to this question NO, NEVER.
How do you detangle all of this the day that your self employed decides to get someone to come in and help with the work load? How do you teach them to delegate $15/hour bookkeeping work so that they can create more billable hours?
We are supposed to assist in educating clients about using financial data to make better biz decisions. If you look at the cost benefit of having a separate bank account you simply cannot make a good case for comingling funds to save bank fees and a few minutes reconciling the account each montyh.
Assuming that the business entity in question is an unincorporated sole proprietorship, it's generally not possible under state law for a sole prop to "loan" money to the entity, as it is simply him or herself. As a general matter, one cannot have an outstanding debt obligation to one's self.
So, a tranfer of funds from a personal account to a business account in such a fact pattern would, in every case I can conceive of, be a capital contribution.
Hello Bruce,
Thank you!
Yes, although a business account is not required, and is often very difficult for a budding indie to maintain, once well-established an indie may find a business account makes things easier.
Glad you like "Attila Attorney." In my book you'll find Billy Bridesnapper the wedding photographer, Caitlin Caterer, Victor Visual the graphic designer, Sally Shrink the psychologist, of course, and Sid System the IT guy. There's also Callous Corporation, P.I. Snoop and Nat Newdad, just to name a few.
I use corny names because many of the examples I use are from real clients and I can't use real names.
You mention my correcting Attila's grammar. I did that to make the point that I wasn't a licensed teacher hoping to show the fatuous quality of his statement that in my saying a business checking account wasn't required for indies I was practicing law without a license.
Well, I failed miserably at the analogy because all the pros were really put out by the grammar correction but none was bothered a lick by his preposterous accusation. Hmmmm ... pretty weird I think. Well, they are probably the same folks who say things such as "very unique" and "a little overwhelmed."
Cheers,
June
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