Do I pay my property tax payments out of my personal or business bank account?
One of our accounting customers asked me this exact question last week. He has his business in an s-corporation and he recently bought a house. I told him to pay it out of his personal bank account because the property tax on his personal residence is not a business expense.
Other CPAs might have told him to pay it out of his business account and code it as a shareholder distribution. Business owners often keep the majority of their funds in their business bank accounts. In that case, it would be easier for them just to write a check from their business account and call it a shareholder distribution (which denotes a nondeductible personal expense) than to transfer the money from their business bank account to their personal bank account first.
Both are technically correct answers because they both accomplish the same thing: treating the payment of the property taxes as a personal (non-business) expense. One answer, however, is safer than the other.
To survive an IRS audit, it is important to maintain a clear separation between business and personal expenses. Paying your property taxes out of your personal bank account provides a clearer separation of business and personal funds. In business audits, the IRS looks for personal expenses that may have been incorrectly deducted as business expenses. It can then charge taxes, interest, and penalties on these amounts. The clearer the separation between business and personal expenses, the better.
You might also wonder, “Can’t my property taxes be deductible if I have a home office for my business?” Great question. Yes, a portion of your property taxes can be deductible if you operate all or a portion of your business out of a home office that fits IRS guidelines, but this is a subject for another article. Please subscribe to our blog to get notified when we post this and many other answers to other great questions.