Shared expenses for a home office and piercing the veil

Question

I have a single-member LLC and I am about to start software consulting with it for the first time. I have a home office and I plan on deducting utilities, internet, and so forth on my taxes. I will only be able to deduct 5-10% of the cost of these utilities, because the office is one room in my personal house. I also plan to pay the utilities with my business bank account. Is there any risk of piercing the corporate veil when paying the entire cost of the utility from the business bank account, even though the business only uses a portion of it? What about vice versa?

Answer 1

The danger is not “piercing the corporate veil” (which basically removes your personal protection against problems that the company might have), but being accused of tax evasion, which the director of the company is fully responsible for.

I suggest you read your tax laws very, very, very carefully or better yet, ask an accountant. An additional risk is that once the inland revenue has their eye on you, they will handle you extra carefully. Not something you want.

Answer 2

I also plan to pay the utilities with my business bank account.

As long as you categorize the payment as a distribution to the owner there is no problem here. Trying to mix up personal expenses with business expenses is problematic on many levels (including loss of limited liability), and an audit would question why this payment was made from the business account.

Several comments are moving along the lines of tax avoidance becaause this looks fishy, and when things look fishy we expect fish. Just transfer money from business to personal and pay utilities with a personal account.

Answer 3

Generally, how the expenses are booked matters more than the accounts out of which they are paid. If accounting entries reflect adjustments for payments of business expenses out of personal accounts and payments of personal expenses out of business accounts, and those area settled up regularly and contemporaneously booked, it isn't a problem.

For tax purposes, it usually doesn't matter in a single member LLC since it is disregarded for tax purposes and the issues are no different for tax purposes than those for a sole proprietorship.

This said, it is always best to contemporaneously document in writing any related party transaction or split expense between personal and business use.