Owners of part-time and small businesses e.g. multi-level marketers, estate agents, consultants and self-employed sole proprietors, often use one bank account for personal and business purposes, resulting in business and private expenses getting mixed up with each other. This can cause problems for the business and the individual in the long run, especially with tax and when applying for loans further down the road.
Why is it necessary to separate business and private expenses by using two different bank accounts? Some of the most important reasons are the following:
The onus rests on the taxpayer to prove that an expense was incurred for business purposes if they want to deduct it for tax. Separate bank accounts can serve to convince SARS that your business is really a business and not just a hobby. In the case where SARS conducts a tax audit it will be easier for the business owner to prove the tax deductibility of business expenses when these are paid from a different bank account than he/she uses for private purposes.
If a business owner mingles business and private expenses, it is easy to overlook a business expense that he/she might be entitled to deduct for tax purposes. Keeping expenses separate can help to ensure that all tax deductions are claimed, decreasing taxable income, and thus reducing tax payable.
If you use a home office, you might be entitled to a tax deduction for home office expenses if you comply with the requirements in the Tax Act. SARS is very strict in applying the requirements to home office expenses. The home office and all furniture and equipment in it must be used exclusively for business purposes. If you have games on your computer, you cannot legally deduct home office expenses for tax purposes. If you would like more information on the deductibility of home office expenses, please contact your tax practitioner.
When a client makes out a cheque in your personal name or deposit money into your personal bank account, it can easily create the impression that you are just making a few rands from a sideline hobby and not really running a business. As expenses relating to hobbies are not tax deductable, this is not the kind of impression you want to make on SARS if you are serious about running your small business as a business, now and in the future.
It looks more professional and as if the business owner is serious about the business if he/she uses two separate bank accounts rather than using the same bank account for both business and private purposes.
It will not be necessary for the business owner and/or the accountant or tax practitioner to sit and sort through slips and personal bank statements from the past, trying to identify business expenses. The money, time and energy saved by having two accounts could be put to much better use in developing the business.
It is easier to get financing when applying for bank loans if the business has a separate identity. The business owner will most probably be required to sign a guarantee in his/her personal name as security for the business’s loan from the bank, but the fact that the business finances are run separately from the personal finances of the business owner will confirm the intention of the business owner to run a business and not just be conducting a hobby.
Keeping business expenses in a separate bank account from personal expenses will make recordkeeping and filing of tax returns much less time consuming and less confusing, and simplifies the tracking of day-to-day business expenses. As mentioned before, time, energy and money saved can be put to better use by investing it in the management of the business.
Although two separate bank accounts, one for business and one for private purposes, will lead to some extra expenses and even double expenses being paid, the long term benefits might well be worth more than the additional outlay for banking charges.
If you would like more information on the benefits of separating business and personal expenses, please contact your tax practitioner and/or financial advisor.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)