What's the Difference Between a Law Firm's Bank Account and The Lawyer’s Wallet

Hi there. Linda Ardesani, Ardesani Accounting and The Proper Trust. I love the title of this week's blog, and it's What's the Difference Between a Law Firm's Bank Account and the Lawyer's Wallet? And basically, this topic is all about what expenses are allowed to go through the business and what are not. Remember, a law firm is a business, and as such, it's important to remember that it needs to be run like a business. And the IRS doesn't like messy books, so it doesn't like when you commingle things. I can tell you that firsthand, and I will share a story with you about that. So you want to keep keeping the problems at bay. If you find that you're spending money on Netflix and you use your business credit card, it's smart to go in and change that credit card, because when you do that, we have to, as bookkeepers, put this amount of money up into your distribution account. And when we put it up there, it becomes a taxable event. It becomes income for the attorney because it's a draw, part of a draw. You're drawing money out of your business to pay for something personal. And this happens, it happens in the real day-to-day life. Sometimes you end up using the wrong check, the wrong credit card. But a best practice is to have 2 credit cards, personal one, and have one for the business. Obviously, you can have more than that, but you want to specifically have one for your business. And it's just set for the business. And I've seen it. I've had it happen where I'll work with a new attorney who's just starting in their own firm. Like, I don't have the credit to get a business credit card. But if you take a personal one and dedicate it only to business expenses, the IRS will be okay with that because, you know, you didn't have the ability, you didn't have the credit to be able to open up a business card, but you don't commingle. That's the big key here is not commingling. A few of the places that the IRS will look and will notice is meals and entertainment is a big one. And first of all, entertainment is not deductible anymore. And meals, although they let us have a little reprieve on that and they gave us the 100% back like we had in the old days, it's now back to you only get 50%. So you get to write off your client's meal, but not your own meal. Where I see this getting abused sometimes is that there's a lot of meals, a lot of meals, and It's most likely that the business owner is taking their spouse out for dinner, and you just want to be careful at how many meals you have, and you want to keep really good records. Keep the receipts, write the name of the person that you took out to dinner on there, or what client that was, so that way we're able to track it. And if you're ever audited, you have something to go by, something on the books for that. And the next thing we see is personal expenses. So we see some things come through the books that we're like, That is not a business expense. You cannot write your haircut off. It is not allowed. You have to cut your hair anyway for natural life. You can't write off your business suit because you might wear that suit at a funeral. You can't write your Gucci shoes off. These are the things that I've seen where they can be in the books, and you— we just have to take them and put it as a distribution for you. So it's smarter just trying to keep those out and really keep that delineation of business and personal. Keep it separate. And so as we— I promised this story. So this was a really awful one because this client, I think, wasn't doing it to be deceptive. He was trying to get points to go on his trip away. So it was a contractor I had a long time ago, and the contractor spent a lot of money on truck repairs. He had older fleet of trucks, and he used his American Express with great points for— might have been Capital One— for great points to be able to charge all these expenses and get the trucks all repaired over the winter. And when he did that, he got a lot of points. He was able to go on his vacation. And the IRS said, when we got audited, the IRS wanted to see all the receipts. And the receipts were on a personal card, paid on a personal card, and then they were Paid back with business funds. These were legitimate business expenses. They were for the fleet of trucks out in the yard. The IRS looked at it, and it was just so messy, even though they were legitimate expenses for the trucks that he used for business. They disallowed every single one to the tune of almost $20,000. Oh, it was a little over $20,000. So he lost $20,000 in expenses. Because he didn't keep clean records. It's a hard story to tell because it was— I couldn't believe that they wouldn't give him those expenses, but they did not. So knowing that that can happen, is it worth a couple of throwing extra meals into your books? I don't know. I know we see it, and it's, it's really to keep the commingling at bay. You might want to have some good practices in place for recapturing and reimbursing staff if they've spent money. We like Relay Bank. There's also Divvy. So you can make like small credit cards. You can really control the amount of money that they're allowed to charge. And then you're gonna be able to have a really great receipt process in place. We like to use Dext, D-E-X-T, for capturing all expenses and keeping track of all the records. It's just something you wanna think about as a business owner. You want to be able to put yourself in a place that you have very good balanced books. It's really essential to having good accounting records. Keep your business and your personal expenses separate. No one wants to pay more taxes than they have to, and that poor business owner that I worked with many years ago did have to do that because he lost out on $20,000 worth of expenses. It was a sad story. So you don't want to be in that place. You really want to keep the business expenses in the business and personal expenses at home. On that note, I hope this was helpful. If you want to learn more about these different topics, you can hit the Subscribe Now button, and I'll see you all on the next video. Bye now.