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  • The Family Business: Perks… Getting Something for Nothing?

    Some people who own a small business see it as a ticket to free goodies. Buy something nice, and the company pays for it. Enjoy the purchase without being out any cash personally.

    Of course, that's not really true. The company might write the check, but every expense means less profit on the bottom line. The owner ends up paying for it in the end.

    Even so, there is one advantage to making purchases through a company. Business expenses are deductible, so they reduce your taxable income. To put it another way, the company will be spending pre-tax dollars rather than after-tax dollars. So, to the extent that the company can legitimately make a purchase, you save the tax you otherwise would have paid on the money.

    A Source of Abuse

    Clearly, this is an area that's ripe for tax abuse. After all, the person who gets the benefits of the so-called freebies controls the checkbook. Lots of temptation there.

    In response, the IRS has created a series of rules to keep business owners' darker instincts in check.

    Take company cars, for example. You can't just have the shop buy a vehicle and pay all the related expenses, while using it for both business and pleasure.

    First, there are strict rules on depreciation. Cars don't qualify for the normal rule that allows a business to depreciate up to $17,500 up front in any year. Instead, they have to be depreciated according to a schedule.

    And if the car is used extensively for personal purposes, the depreciation is straight line. No accelerated write-offs.

    The business must also keep an exact log of all personal and business use. And the individual must pay for the personal use.

    The Car Solution

    There is a simple way to make sure you get all the appropriate tax benefits on a company car, without creating any tax problems.

    Just buy the car yourself, and charge mileage to the company for your business use. It's easy. It's clean.

    And there is even a better benefit - no audit problems.

    One of the first things a tax auditor will do is look for personal expenses being paid by the company. And company cars are always at the top of their list.

    If there is no company car, there is no issue.

    What About Travel?

    Same issue. You don't want to do something illegal or increase your risk of an audit. It's just not worth the few dollars you might save.

    So, if a trip really is personal, belly up to the bar and pay for it yourself.

    On the other hand, don't be shy about claiming the appropriate deductions for true business trips. Industry conventions, workshops and events are prime examples of justifiable business travel. Gift-show buying trips are also easy candidates.

    Travel for these sorts of purposes is clearly deductible. And there's nothing wrong with going out to dinner and enjoying the location where the gift show is.

    The problem is when you add on a personal side trip or extend your stay after completing your business. In these cases, you must pay for the personal travel, as well as a prorated portion of the ticket that got you to the original location. Your tax advisor can tell you exactly how to handle specific situations.

    Other Perks

    There are many legitimate perks to owning your own business: business travel, health insurance (if you're set up properly), and occasional entertainment of suppliers and customers, to mention a few.

    However, there are also many other items that you shouldn't try to expense.

    How do you distinguish between the legitimate business expenses and the ones that would cross over the line?

    The first question is an ethical and moral one. How much is your integrity worth? Hopefully, it's not for sale Ü at any price.

    There's also the IRS to think about. Push the envelope too far, and you run the risk of getting caught. In that case, tax penalties and interest can add up to quite a tidy sum.

    The Best Advice

    Don't try to take what isn't yours. Your conscience will be clear. You will sleep better at night.

    In the end, veering off the straight and narrow path is a more dangerous and more costly way to go. Make the choice to play fair.


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