Business Financing – Tax Problems Caused By Intermingling Funds
Monday, August 21, 2023
A common problem with single-owner and other closely held corporations is intermingling of funds. This occurs when a corporate shareholder uses his or her personal checking account for corporate deposits or payment of corporate expenses.
Separation of funds can be a key in preserving the liability protection of the corporate veil. Courts can pierce the corporate veil by finding that the corporation is an “alter ego” of the shareholder, essentially stating that the corporation is not separate and distinct from the individual as evidenced by the intermingling of finances.
Also, a shareholder who deposits personal funds or pays personal expenses from the corporate checking account is intermingling funds. For the same reasons as the reverse, courts can cite this as evidence that the corporation is not a separate and distinct entity from the individual.
Tax Problems Caused By Intermingling Funds
Unintended tax consequences can occur when personal and corporate funds are intermingled. When a shareholder provides funds to or on behalf of a corporation, there are several different types of tax treatment that may apply, depending on the circumstances. For example, when a shareholder provides funds to a corporation, it can be classified as one of the following transactions.
- Capital contribution
- Loan to the corporation
- Repayment of a loan from the corporation
- Expense reimbursement
- Purchase
When a shareholder purchases an item for the corporation from his or her personal funds, that shareholder is considered to have provided funds, or made a contribution, to the corporation. Classification is determined by how the transaction is structured and the circumstances surrounding the transaction. Providing funds to corporations without careful planning can cause unintended tax consequences.
If an individual takes funds from a corporation checking account, the transaction can be classified as:
- Taxable dividend
- Nontaxable distribution
- Nontaxable expense reimbursement
- Wages
- Loan to the shareholder
- Repayment of a loan from the shareholder
Failure to carefully structure transactions when taking disbursements from a corporation can result in otherwise nontaxable transactions becoming taxable, in addition to opening the corporation up for a court to pierce the corporate veil.
Personal Use Of Corporate Assets
A similar situation with intermingling funds occurs when personal assets are used by the corporation and vice versa. If corporate assets are used for personal purposes, the IRS can reclassify expenses reported on the corporation’s tax return as expenses attributable to the shareholder rather than the corporation. On the other hand, if a corporation uses personal assets owned by the shareholder, this could indicate a lack of separation of the shareholder and corporation, opening up the possibility of having the corporate veil pierced.
About J&S Accounting
At J&S Accounting, we provide expert bookkeeping services tailored to the unique needs of small businesses and nonprofits. We recognize the challenges that come with maintaining accurate financial records and how vital this is for the smooth operation and growth of your business. As a woman and minority-owned firm, we’re proud to offer our expertise to businesses in Savannah, GA, and across the nation, helping them navigate financial complexities and achieve better financial management.
More Articles
Keeping accurate and organized financial records is crucial for builders. With multiple projects, numerous transactions, and a variety of expenses, maintaining a streamlined bookkeeping system is essential to your business's success. Here are some best practices to help you organize receipts and records efficiently.
As an electrician, your expertise lies in wiring, installing, and maintaining electrical systems, not necessarily in managing the financial aspects of your business. However, keeping your finances organized is crucial for your success.
Managing finances is crucial to running a small business. Business owners can ensure long-term stability and growth by implementing effective financial strategies. Here are eight essential financial planning tips for small business owners.
CUSTOMER TESTIMONIALS
What others are saying about us
" I could not recommend this company enough!"
The team at J&S Accounting are like working with trusted friends that you have had for a long time. Janel has personally walked me through my first year with QuickBooks as a small business owner, and has made it so easy and enjoyable. She is very professional, knowledgeable, and is always so affirming of how well I am doing. She really takes her time and you can tell that she cares about her customers and wanting them to feel confident about their business finances. I could not recommend this company enough!
- Kelsey H.
"The level of professionalism and commitment to supporting small businesses like mine is unmatched."
If I could give J&S 6 stars I would because they go the extra mile every time! I am so glad I found J&S Accounting. The level of professionalism and commitment to supporting small businesses like mine is unmatched. I am so grateful for J&S. I highly recommend!
"Their customer service and individualized care have remained top tier and we gladly recommend their services."
J & S Accounting has made such a huge impact in our day to day operations at Kicklighter Resource Center. They are very hands on and truly take the time to educate us, whether in person or through trainings and tutorials. Their customer service and individualized care have remained top tier and we gladly recommend their services.
- Jay Ahnee
© 2023-2025 J&S Accounting and Tax Services LLC, dba J&S Accounting.
All Rights Reserved
Disclaimer:This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business from a professional accountant. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. J&S Accounting does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. J&S Accounting does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers and viewers should verify statements before relying on them.
© 2023 J&S Accounting. All Rights Reserved.
Disclaimer
This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business from a professional accountant. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. J&S Accounting does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. J&S Accounting does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers and viewers should verify statements before relying on them.