After six years of running his own venture, Avi from Philadelphia admits he doesn’t even know if his business is profitable or how much he owes in taxes for the past two years.
In an episode of “The Ramsey Show,” he described to host Dave Ramsey how he made the critical error of mixing his business and personal expenses for several years, which has left his finances in a tangled web.
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“Dude, you’re a hot mess,” Dave Ramsey laughed.
Avi’s situation highlights the challenges business owners face when they operate solo and don’t have the financial skills needed to succeed.
Risk of tax consequences
Around a third of small business owners try to manage their own bookkeeping, according to a survey by Quickbooks Live Bookkeeping.
Unfortunately, without professional accounting some of these business owners expose themselves to scrutiny from regulators. Mixing personal and business expenses can raise red flags for the Internal Revenue Service, and inconsistencies in filing can trigger an audit.
Avi’s risk of consequences is heightened by the fact that he has fallen behind on filing his tax returns for the past two years. Ramsey was shocked at the negligence.
"Not filing federal income tax returns is a criminal offense,” he insisted. “You need to get that part of your life cleaned up immediately.”
His tax liability isn’t the only mystery. Avi is also unsure if his business is profitable and whether it generates enough revenue to sustain his family’s lifestyle.
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Mixing business and personal
Avi believes his business might be operating at a loss. However, he isn’t sure if that’s the case because he tends to pay himself from the business whenever he needs cash and hasn’t managed to keep his business and personal accounts separate until recently.
Nevertheless, the growing mountain of debt on both his business and personal accounts has convinced him his business revenue is falling short.