When the Corporate You Needs to Say No to the Personal You

Unsplash-Alessio Lin(Originally posted 02/16/2018)

One of the hardest things many small business owners and entrepreneurs need to overcome is the urge to “let the company pay for it.” Whatever the” it” is.

You and your business are separate entities, so you need to be careful and truthful about your personal expenses and never run them through your company unless they are vital to running your business.

For example, a case can be made for having the company buy a state-of-the-art 50-inch flat screen HD-TV . . . if you are in the business of producing television shows or TV commercials. But, a lawn service guy or tax attorney generally can’t provide a reasonable explanation that the television is a necessary expense for conducting business.

Similarly, a commercial fisherman or a professional water skier can declare the purchase of a boat as necessary to his or her profession. But, it would likely be indefensible for a painting contractor or computer programmer to buy a boat through his or her company as a “business expense.”

When a business owner tries to disguise personal expenses as business expenses, it’s called “self-dealing,” which doesn’t sound that bad . . . until you realize that the phrase the IRS uses is “tax fraud.”

The consequences for tax fraud are substantial. Here is the appropriate section of the U.S. Code:

Title 26 USC § 7206(1)—Fraud and false statements

Any Person who… (1) Declaration under penalties of perjury – Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; shall be guilty of a felony and, upon conviction thereof;

  • · Shall be imprisoned not more than 3 years
  • · Or fined not more than $250,000 for individuals ($500,000 for corporations)
  • · Or both, together with cost of prosecution

But, you may argue, “My tax advisor told me I could do it!”

If that’s the case, you may well have company in prison. Here’s what the U.S. Code says about giving advice to commit fraud:

Title 26 USC § 7206(2)—Fraud and false statements

Any person who…(2) Aid or assistance – Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the Internal Revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; shall be guilty of a felony and, upon conviction thereof:

Shall be imprisoned not more than 3 years

  • Or fined not more than $250,000 for individuals      ($500,000 for corporations)
  • Or both, together with cost of prosecution

Author: hunterbrowncpa

Business Coach, Entrepreneur and CPA

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