Transfers Between a Client's Own Accounts: Income or Not?

Transfers between a client's own accounts are deposits of money the client already had, moved from savings, a personal account or a sister company. They are not new income, but on a deposits review they look like it. Prove each one by finding the matching withdrawal on the other account's statement, and keep that statement in the workpapers.

Which transfers between a client's own accounts look like income?

The transfers between a client's own accounts that pass for income are the ones whose source is not obvious from the deposit line. A round-number deposit, a mobile check deposit or a counter deposit with no description can be a customer payment or the owner's own savings. The bank statement alone rarely says which.

Some descriptions give the source away. "Online transfer from SAV XXXX-9050" names the account. Others hide it:

• Transfers from another bank. An ACH credit from a different institution often shows only that bank's name and a reference number, which looks exactly like a customer paying by ACH.
• Personal checks deposited to the business. The owner writes a check on a personal account and deposits it. The business statement shows a check deposit, the same as a customer check.
• Cash redeposits. Cash withdrawn from one account and deposited to another shows as a cash deposit, the same as cash sales.
• Loan proceeds and credit line draws. Money from a line of credit lands as a deposit, and the lender name may be shortened beyond recognition.
• Refunds and reversals. A returned payment or a vendor refund is money coming back, not revenue. It belongs with the expense it reverses.

Why the answer matters is easy to see in how the IRS approaches deposits. The Internal Revenue Manual chapter on examination of income, IRM 4.10.4, tells examiners analysing bank accounts to reconcile deposits of nontaxable funds and transfers between accounts. It says nontaxable funds, transfers in and returned deposits need to be subtracted from total deposits to get taxable deposits, and that attention to transfers can identify previously unknown accounts. A firm that can show the source of every non-income deposit has done the same subtraction first.

Card processor payouts are a different case. They are income, but they arrive net of fees, so they do not match sales either; the guide on how to reconcile merchant processor deposits covers them.

Proving a transfer from an account the firm has never seen

Proving a transfer from an account the firm has never seen means getting a statement for that account that shows the matching withdrawal. The client's word that "it came from my savings" is a starting point, not evidence. A statement showing the same amount leaving on the same day, or a day earlier, is the proof a reviewer can check.

When both accounts are in the books, matching them is routine, and matching transfers between a client's accounts explains how to book the movement once instead of as income on one side and an expense on the other. The harder case is a personal account, a spouse's account or an account at another bank that the firm does not reconcile.

Ask for the narrowest evidence that answers the question:

1. The statement page for the month of the transfer. Only the page with the withdrawal is needed. The client can redact other lines if they prefer, as long as the account name, the last four digits and the withdrawal remain visible.
2. A transfer confirmation. Online banking usually shows a confirmation with both account numbers masked to the last four digits. It is weaker than a statement, because it shows the request rather than the posting, but it helps when the statement is slow to arrive.
3. A copy of the check. For a personal check deposited to the business, the image of the check shows the drawer's name and account. The bank can provide it from the deposit record.

Match amount first, then date. Transfers between two banks may post a day or two apart, and a transfer started on the last day of a month can arrive in the next. That timing case is covered in transfers that land in a different month.

Note the source account on the transfer schedule by bank and last four digits, such as "Example Credit Union personal savings XXXX-2264." That label lets next year's reviewer recognise the account without asking again.

Owner contributions and draws between business and personal accounts

An owner contribution is money the owner puts into the business from personal funds; an owner draw is money the owner takes out for personal use. Neither is income or an expense of the business. Both are recorded against the owner's equity, so the business's profit is not changed by the owner moving money in or out.

For a sole proprietor or a single-member business, the owner's personal account and the business account are often at the same bank, and money moves between them freely. Each movement into the business is a contribution; each movement out to the owner is a draw. When the books show these as "sales" or as "miscellaneous expense," the profit figure is wrong in both directions.

IRS Publication 583, which covers starting a business and keeping records, advises keeping a business checking account separate from a personal one. It says to record whether each deposit is business income, personal funds or a loan, to note the source of each deposit on the deposit slip, and to keep copies of all slips. That is the record that makes a contribution provable later.

In practice, set up two equity accounts if the client does not have them: one for contributions and one for draws. Record a contribution as a debit to cash and a credit to contributions. Record a draw as a debit to draws and a credit to cash. Business expenses paid from a personal account are a separate case: the expense is recorded in the business books with a credit to contributions, because the owner funded it. How these balances are treated on the return depends on the entity type and is a decision for the preparer.

Draws do not need the same proof as contributions, because money leaving the business does not raise a question of unreported income. They still need a label. An unlabelled transfer out to "XXXX-7730" is a draw only if XXXX-7730 is the owner's account, and the schedule should say so.

Related-entity transfers and due-to, due-from balances

A related-entity transfer is money moving between two businesses with common ownership, such as an operating company and its building company. It is not income to the receiver or an expense to the sender. It creates a balance between the two: a "due from" asset in the payer's books and a matching "due to" liability in the receiver's.

The difference from an owner transfer is that the other side is another set of books. If Company A sends $8,000 to Company B, Company A records a due-from balance of $8,000 and Company B records a due-to balance of $8,000. When the two are reconciled at year end, the balances should be equal and opposite. A mismatch means one side recorded the transfer differently, or recorded only part of it.

Ask the client what each transfer was for. A related-entity transfer may be a loan, rent, a management fee or a payment of the other company's bills. Each of those is recorded differently, and the bank line does not say which. The firm records what the client and the agreements describe; it does not decide the character of the payment for them.

Keep a separate schedule for each related-entity pair: date, amount, direction, purpose and the running balance. When the firm prepares both companies' books, tie the schedule from both sides each month. When it prepares only one, ask the client for the other company's ledger detail for the account, or at least its year-end balance.

Is cash withdrawn and redeposited a transfer?

Cash withdrawn from one of the client's accounts and later deposited to another is a transfer, but only if the withdrawal and the deposit can be tied together. A cash deposit with no matching withdrawal looks the same as cash sales. The client needs to explain it, and the explanation needs paper behind it.

Cash breaks the trail that a bank transfer leaves. An ATM withdrawal of $1,800.00 on a Friday and a cash deposit of $1,800.00 the next Monday are probably the same money, and the schedule can say so with both statement lines cited. A withdrawal of $2,000.00 and a deposit of $1,800.00 three weeks later are much harder to connect, because the client could have spent the cash and deposited something else.

Ask the client three questions for each unmatched cash deposit:

• Where did the cash come from? A withdrawal from which account, on which date?
• Why was it withdrawn and redeposited instead of transferred?
• Is there any record, such as a withdrawal slip or an ATM receipt, that ties the two?

If the client cannot answer, leave the deposit unexplained on the schedule and let the preparer decide. Do not exclude it on the strength of a guess. An excluded deposit without support is exactly what a reviewer, or an examiner, will ask about first.

A year-end schedule of own-account transfers for the reviewer

A year-end schedule of own-account transfers is a list of every deposit the firm has excluded from income because it was the client's own money moving, with the source account, the matching withdrawal and the evidence kept for each. It shows the reviewer the year's exclusions at once and flags anything unproven before the return is prepared.

Example schedule for a fictional sole proprietor

Dana Okafor (example client) runs Okafor Design Studio as a sole proprietor. All names, accounts and figures below are example values for 2026. Business checking XXXX-4821 and business savings XXXX-9050 are in the books. Personal checking XXXX-7730 and personal savings XXXX-2264 are not.

Four deposits are proven and total $12,500.00: $5,000.00, $2,500.00, $3,200.00 and $1,800.00. The fifth, $4,150.00, is not. The check image shows a personal check, but the drawer's account does not match any account the client has disclosed. Together the five deposits examined total $16,650.00, of which $12,500.00 is excluded with support and $4,150.00 is still open.

The November deposit goes back to the client with a specific question: whose check was it, and what was it for? Until the answer arrives with paper behind it, the schedule keeps the deposit open and the preparer is told it has not been excluded.

A schedule like this also catches accounts that were never disclosed. If a transfer arrives from an account the firm has no statements for, that account belongs on the client's list. When an account closes during the year and its balance moves to another, the closing transfer is the last line for that account, and the post on how to reconcile a closed bank account covers finishing it.

Gathering the proof is mostly a document problem: one statement page here, a transfer confirmation there. Schema CPA sorts every statement a client sends by issuer and period, so a personal savings statement sent as transfer proof is filed under the right issuer and month rather than lost in an email thread. The document categories on the homepage list the bank statements it reads.