A hotel owner is proud of the properties they’ve built and the clientele they’ve served. But the blurred lines between personal and business expenses? Not so much.
Their bookkeeper flags dozens of mixed and delayed transactions, and it turns out keeping one set of finances isn’t as “good enough” as they thought. Tax season and audits have proved this otherwise.
If you aren’t categorizing your expenses properly, you may be increasing legal, financial, and tax-related risks. We’ve outlined why bookkeeping is more than just a best practice.
What are the Risks of Mixing Personal and Business Expenses?
You may be one of many business owners who have used their personal credit card in a pinch. This harmless move can stress out your bookkeeper as financial and tax issues start piling up.
Commingling refers to the mixing of personal and business funds, whether done in investment or bank accounts. It’s one of the most common (and costly) mistakes small business owners make.
Hotels earn revenue from multiple channels, and each has its own profit and cost structure. When personal expenses enter that mix, it becomes nearly impossible to know which department is profitable and which is leaking money.
Commingling funds can create tax, accounting, and legal complications, particularly if business deductions cannot be adequately substantiated.
These are the implications of a simple expense mix-up:
- Increases the risk of tax return inaccuracies
- Difficulty documenting deductible business expenses
- Raises the likelihood of an audit
- Creates inaccurate records
- Makes informed business decisions more difficult
Financial reports provide information that can support decision-making and help owners better understand long-term business performance. You don’t want to let this disorganization turn your bookkeeping into a nightmare.
What Are the Mistakes That Flag an IRS Audit?
The IRS follows patterns, and messy financials are the clearest of all.
To help reduce audit risk, avoid these common mistakes:
- Owner fails to maintain a formal legal separation
- Financial fraud or wrongful conduct
- Using “miscellaneous” as a catch-all
- Inconsistent recordkeeping
Remember, if you have multiple businesses, all accounts must be maintained separately from your personal account and from each other. This even includes borrowing funds between them.
Travel and lodging deductions are particularly nuanced.
When auditing hotels, one might verify transactions, compare occupancy records to revenue, or verify that sales taxes from restaurant bills align with deposits. Any inconsistency between your books and your actual operations is a problem.
A hotel owner is still eligible to deduct travel expenses, but only with clear documentation of the business purpose. You can’t deduct personal charges, such as extravagant meals and lodging.
Make good judgment and connect with your CPA if you’re not confident with where and when you’re using your business credit card.
What is at Stake for Different Entity Structures?
The reason businesses choose certain entity structures comes down to the benefits, specifically limited liability.
Limited Liability is a legal protection that prevents business owners from being held personally responsible for their business’s debts. It is intended to help shield personal assets, such as your home, vehicle, and personal savings, from certain business liabilities.
It’s not worth losing protection against liability for obligations by making small mistakes in expense reporting. Even still, this protection is not automatic.
Businesses must be operated distinctly from their owners; otherwise, this results in “piercing the corporate veil.” This is what exposes owners to personal liability, putting your homes, vehicles, bank accounts, and investments at risk.
Imagine a guest slips in your hotel lobby and sues for $800,000.
Luckily, your hotel’s insurance covers most of it. An example could be a court discovering that you’ve been running personal vacations or repairs through your hotel’s operating account. Then, they can rule that you and your hotel are legally the same entity. Suddenly, your personal bank accounts, real estate, and all other assets are fair game.
Before you start blurring the lines in your bank account, think of what you could compromise. In some situations, poor separation between business and personal finances can increase the risk of personal liability if your business faces legal or regulatory scrutiny.
How to Separate Business and Personal Expenses
First, it’s important to note the proper distinction between the two expense categories.
According to the IRS, a business expense must be “both ordinary and necessary” to be deductible.
- Ordinary: One that is common and accepted in your industry.
- Necessary: One that is helpful and appropriate for your trade or business.
Don’t know how to begin proper separation?
These are practical ways to separate your expenses and maintain stronger financial records.
- Establish a legal entity for your business
- Open a business checking account
- Get a business credit card
- Pay yourself a salary
- Separate and keep all receipts
- Track shared expenses
- Keep track of when personal items are used for business
- Educate your employees
Where do I begin?
It’s important to start by deciding the best plan for recording and categorizing transactions. The rest of the steps will start to fall into place once the right foundation is set. A CPA who’s well-versed in the hospitality industry can help you lay out the right steps.
Build Confidence in Your Business Expenses
One benefit of properly categorized expenses is having documentation that may make audits, reviews, or tax preparation less burdensome.
Accurately separating business and personal expenses may help you identify eligible deductions and maintain compliance with IRS requirements.
When you work with the right team, like MBE CPAs, we provide a clearer picture of your business’s financial health. Our hospitality team can help strengthen financial reporting practices and provide the documentation that investors, lenders, and other stakeholders often expect. More reliable financial reporting may support valuation discussions and due diligence efforts if you pursue a future sale.
Tax time isn’t when you should start digging through your receipts. Separating expenses helps maintain cleaner financial records and may make it easier to respond to IRS inquiries or other requests for documentation.