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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.

“I’m accruing debt, that’s my problem,” he said.

Avi estimates he has $50,000 in credit card debt and roughly $80,000 in business loans. If he finds he owes taxes after filing his debt burden could increase.

Ramsey believes Avi is flirting with financial disaster.

“It’s freaking amazing that you’ve survived as long as you have,” he said.

Thirty-four percent of small businesses were concerned about debt payments in 2023, according to the Federal Reserve Banks’ Small Business Credit Survey.

To avoid bankruptcy, Ramsey recommended Avi enter “panic mode” and file his missing tax returns as soon as possible, as well as separate spending between personal and business accounts.

“Never again pay anything personal out of that [business] account the rest of your life,” Ramsey said.

With a clearer picture of the business’ profitability, Avi can decide whether his best option is to expand the business or abandon it altogether in favor of a full-time job that’s more lucrative.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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