It can seem like more work to open a specific business bank account, but it actually saves time in the long run to keep your personal and business transactions separate. A small investment of time up front pays off later. You can have multiple checking or savings accounts, and business credit cards. 

Business checking & savings accounts

There are two issues with business checking and savings accounts. One is that the account is separate from your personal accounts. The other is whether the account is in the name of the business. 

Reason to have a separate checking account

Here are some of the basic reasons to get a business checking account and keep transations separate from personal transactions. 

1. Having a separate business account keeps personal transactions separate from business transactions.
2. If your business was audited, you don’t want the auditor to have to search through all your grocery and entertainment purchases trying to figure out what is really a business expense since some business expenses can look personal. If an auditor only asks for your business banking records, you want to be able to give them only your business banking records.
3. It shows that you are responsible about only deducting business expenses because you have a clear separation between business and personal accounts.
4.  It will make your life easier when you have an accounting issue or mistake, to have all your transactions for business segregated into a business only account. We tend to have a lot more personal transactions than business transactions, so mixing them can make it more difficult when one is searching through transactions for business only items.

Reason to have an official business checking

You could have a separate account that is a personal checking, to keep transactions separate. Here are some reasons to make sure your separate checking is an official business account. 

1. Banks have rules about not using personal accounts for a business purpose. Running a business from a personal account could violate the terms of the account.
2. If you need help from the bank, the business customers call a different customer service line. Being recognized by the bank as a business customer can be useful. In the pandemic we saw programs created for business owners that weren’t necessarily available to those who didn’t have the business banking component to their business.
3. It’s helpful when you need a business loan or mortgage, to back up your accounting statements with bank statements that are only for your business, not messy because they are commingled with personal transactions. Lenders do not want to see all your personal transactions for this purpose.
4. If your business is an LLC or Corp, it’s required because all assets need to be held in the business name and under the business EIN. There is no point to having a business entity and then put all the assets in your personal name.
5. If you are a sole proprietor, these reasons are enough to open a sole proprietor bank account. If you have a sole proprietor EIN, the EIN is usually enough to open a business account. If your bank does not offer sole proprietor business accounts, find a different bank or verify the info you received is accurate. Businesses are not required to form a business entity to be considered a business and banks know this.

What if I already started my business?

It's never too late to open a separate business checking account. You can keep using your current account while you get the new business checking set up, and get transactions transfered over to the new account.

Can I have multiple accounts?

Yes! You can have many business accounts, both checking, savings and credit card. You can have as many as you need. Many people set up multiple savings accounts for general savings, owner PTO, owner profit, tax savings or a second checking for employee payroll. 

Business Credit Cards

A business credit card can be useful to use online in case of fraud. If your checking debit card number is stolen they can drain your account and you have to report it to get the money back, and sometimes wait. If your credit card number is stolen, they can remove the charges and you do not lose any cash and do not have to wait for it to be resolved. 

You can also get credit card rewards, either cash back rewards or points. 

Does the card need to be in my business name?

If you are a sole proprietor and have a personal card in your name that you use exclusively for business, it's still better to get a business card but it's okay. If your business is an LLC or S-Corp, you want any debt to be in the name of the business, so get a business card. You will usually have to personally guarantee the card, but at least it's in the business name.

Can I deduct credit card rewards

To determine what you can deduct: 

Step One: Determine if this is revenue or a reduction of expense (rebate).

• Many points and reward programs are tied to purchases. That means the more you spend the more you get. If that is the case, the points and rewards are a reduction, like a refund or rebate, of past purchases. Therefore, it is reducing what you spent in the past and is not income. For example, if you get one point for every $1 spent, then the money you are spending now is going to be refunded to you later and that cost will be eventually lower, after you get the rebate. If you think of a rebate, you spend $100 on an item and get a $25 rebate, send the rebate in, your purchase really cost you $75 not $100. In your accounting system you would record the $100 purchase, let's say as an office expense, and the $25 refund/rebate as an office expense, so your final expense is $75.
• Some points and rewards might be incentives or gifts. If they are not tied to spending, they are likely going to be considered other miscellaneous income. You can call your credit card company and ask them what they consider your rewards and points on your card to be, income (which means you need to record income) or a refund of past purchases or rebate (which means you can reduce the expenses).
• The general impact is the same. Whether you have $100 of expense and $25 other miscellaneous income or $76 expense, either way your profit is $75 lower than it would be without the purchase + reward. 

Step Two: Determine if this is personal or business.

• If you have a business card and buy things for the business on it, then whether it is income or a reduction of expense it is a business reward and needs to be recorded in your business.
• It is always more complicated if business and personal are mixed. So let’s say you get points on your business card, it is not a personal card, it is not used for personal. But you use the points toward something personal. Two things have happened. First, you got a reward/refund for your business purchases that needs to be recorded in your business, and two you made a personal purchase that doesn’t need to be recorded anywhere. Or another complicating situation: you use your personal card for business, is the reward/rebate for those business purchases or personal purchases? It’s probably for both, and you may need to allocate it.

IRS Guidance

There is some IRS guidance to help with recording rebates and rewards for credit cards:

“Section 61 provides that gross income means all income from whatever source derived. A rebate received by a buyer from the party to whom the buyer directly or indirectly paid the purchase price for an item is an adjustment in purchase price, not an accession to wealth, and is not includible in the buyer’s gross income. See Rev. Rul. 76-96, 1976-1 C.B. 23, as modified by Rev. Rul. 2005-28, 2005-1 C.B. 997.”

https://www.irs.gov/pub/irs-wd/1027015.pdf

Regarding business miles/mileage from business credit cards: The IRS currently will not tax business miles. If you have a business card that accumulates airline miles for example, you can use those miles to purchase personal plane tickets.

"Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively."

https://www.irs.gov/pub/irs-drop/a-02-18.pdf

Summary of cash rewards

Ask your credit card company or look at the terms to see what the rewards are points are: income to you or a refund of expenses aka rebate. Then ask your tax professional to help you be sure you are properly recording the transaction, or ask in the Simple Profit membership. When possible, keeping business and personal separate, including for rewards, is going to make the accounting easier and the answer clearer.

Bottom Line

it is important and beneficial to you as a business owner to keep banking separate from personal so the transactions are separate. It's also important to have accounts set up in the name of your business. You can have as many business checking and savings accounts as you want, each with their own specific purpose. You may earn credit credit card cash back rewards or other types of benefits, and how those get recorded can be confusing and you may need help navigating that process. Your tax professional or the Simple Profit membership can help with that process and understanding.