Commingling Assets – Commingling Funds Illegal

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I just had a new client come in that had some issues with commingling. The prior accountant had put the companies factory on the company income tax return, and taken an inappropriate deduction for depreciation and other building expenses. We asked for a copy of the interest statement on the mortgage of the property and realized that the building was actually owned personally rather than by the Corporation. The owner was in fact renting the building to his own entity, and the building expenses belonged on his 1040. Why is this so important? Because there are different tax laws for different types of entities. What is deductible at the corporate level is not deductible at the personal level. The opposite is also true. This is why the commingling of assets and funds is so important. One might say something like, well I’m only deducting the building once. Why does it matter where I take the deduction? I own the company. I own the building. What’s the big deal? Because tax laws are neither reasonable nor fair. If you commingle your assets, you may be taking deductions where you are not entitled to take them. Auditors have a field day on these issues. They start handing out penalties and interest like bad ties on Father’s Day. Generally speaking, the only assets that belong on a companies balance sheet are the assets owned by the company, controlled by the company, and used by the company for the creation of income. If the mortgage is in your name, you certainly can’t take a deduction for interest expense on your corporation return. Is the Commingling of Funds also illegal? Yes. It is illegal for the same reason as the former example. Let’s illustrate this with an example. You own a business that reports its income on an accrual basis. You bill your customers creating accounts receivable. When the invoices become noncollectable or are adjudicated as such, you take a bad debt deduction. Everything is fine so far. But you have commingled everything. On the personal side, you lent money to a friend. It has now become apparent that you will never see any of that money again, so you write it off as a bad debt. Is everything still okay? Absolutely not. Personal bad debts are not deductible on any form inside the US Income Code. Have you broken the tax code. Yes. If audited will you probably face additional tax, interest, and penalty. Yes. Depending and size of the debt, and your intentions, could you face a tax evasion charge? Possibly. Did the client think that they were doing anything wrong? No. Tax law is neither reasonable nor fair. What is the solution? Unless you know tax law as well as a taxation professional, you probably shouldn’t try to do this yourself. Hire someone that has the experience necessary to protect you, your family, and your business. Ignorance of the law is no defense. Hire someone that you trust. Don’t commingle your assets or funds. If you have issues in regard to this, we would love to help. I enjoy hearing from my readers, and can be contacted at Chris@AccountingSolutionsLtd.com For additional accounting articles and resources, please go to www.AccountingSolutionsLtd.com