Tax Strategist or Tax Evader?

C’mon…admit it. You know someone who’s done it.

  • Maybe they took some petty cash and used it to pay for a couple of cases of beer, some food at the store and lunch with friends.
  • Shared a company car with a teenage daughter on the weekends.
  • Charged that expensive dinner with the missus on the corporate card.
  • Bought a bunch of clothes and other household stuff and charged it to the business.
  • Wrote off an entire resort vacation with the family because they made a single, one-hour sales call to a customer while in town.
  • Had the contractor who upgraded a home kitchen send an invoice to the company.

Yeah, you know someone who’s done this stuff. Or at least some of it. Right?

The truth is, many people have at one time or another. Many clients, many business owners have done this. No one’s perfect. No one talks about it, or likes to admit it.

But it’s too tempting.

Charging a personal expense through the business means taking a deduction for it against income. And if our state and federal tax rates are somewhere between 20-30% combined then effectively that could be like getting a 20-30% discount on those things purchased. It’s a perk of being a business owner, right?

What harm is there?

And really, who’s going to know? Chances are someone probably won’t even get audited. And besides, it’s such a small amount, relatively. The IRS has much bigger fish to fry, right?

Is charging personal expenses through the business legal? Of course not. It is fraudulent. But the legality is not the issue. There’s another issue. A bigger issue.

Tax Minimizers or Tax Evader?

My dad used to tell me there are two types of taxpayers in this world: tax minimizers and tax evaders.

Tax minimizers do everything they can, within the law, to minimize paying their taxes. They plan. They defer income where they can, increase expenses when they’re able. They take advantage of credits and deductions. They may take an aggressive position here or there, but always with good, documented reasons. Considering that taxes are the number one highest expense for any business person, smart business people are always good tax minimizers. But dumb business people are tax evaders. These are the people that seek to reduce their taxes by any means, legal or not. This is not a good practice.

Running personal expenses through a business may not seem significant. It may only represent a small amount of overall expenses. But it represents something much more significant. Someone who willfully runs personal expenses through the company without any explanation, no justification, no reason, then officially categorizes themselves as a tax evader. And if they one day are unfortunate enough to be the subject of an audit, an IRS auditor will judge them on this behavior.

A $500 fraudulent deduction could be, in her eyes, a clue to something much, much bigger. If there is distrust or lack of credibility then the agent may dig further, create more havoc and spend more time disrupting the business – whether there’s good reason or not. That stupid dinner that was run through the company could cost countless unproductive hours responding to IRS requests. And that’s painful.

So next time you see someone charging a personal expense to their business, do them a favor and share this article with them. It’ll make you a better friend, and help them become better business owners.