When you are at the helm of both a business and your personal life, it can be challenging to distinguish between the two. You may believe it is OK to list a family vacation as a work trip or to use money from your business to cover personal expenses. However, you run the real possibility of getting into some trouble with the law if you fail to keep your business and personal finances separate.
Examples of using business funds to fund personal expenses include:
- Using company funds to pay for gas for a trip that is not related to work
- Taking out a loan with the company’s name but using those funds for personal expenses
- Having a home renovated and charging it under the company
- Charging personal dinners with friends and family to the company card
- Borrowing the company card to pay for vacations, groceries and other personal expenses
Owners of businesses can reduce their taxable income by deducting certain business-related costs. As a result, many people disguise their personal spending as business charges. However, this could constitute tax evasion or embezzlement, both of which carry serious penalties under the law.
Misappropriation of funds
It is unlawful to use someone else’s property without their authorization. If you are not the sole owner of your business or if you have shareholders involved, you may be tagged for misappropriation of funds or embezzlement. In Minneapolis, embezzlement carries a penalty of 90 days to 20 years imprisonment and fines from $1,000 to $100,000.
When you are running just small amounts of groceries and bills through your business, you may think that this is not a problem. However, any attempt to avoid paying or underpaying taxes is tax evasion. Using a corporate account to pay for personal expenses and claim those costs as business expenses would be illegal.
If IRS becomes aware of your actions, you may have to pay late payment penalties of 5% to 15% of unpaid taxes and late filing penalties of 5% of unpaid taxes. Not filing any taxes at all could lead to prison time.
So, think twice before charging your home renovation or supplies to the company credit card. The good news is that it is not too late to make things right. You may still resolve your tax issues and potentially establish a repayment plan with the IRS.