Running personal expenses through your business is a bad idea for so, so many reasons. Why? Well, the no. 1 reason is: IT’S FRAUD. But if that’s not enough for you, I have a few more things for you to consider.
There’s a general misunderstanding about which expenses you can run through your business. If you’re taking a client out for lunch to discuss a proposal, that is a legitimate expense. If that client becomes a friend, and you’re now going out on the weekend with him to grab drinks, it could be tempting to continue to run all those expenses through the business. Contrary to popular belief, this is not a gray area. Sorry, not sorry.
While you may be gaining some much desired, albeit shady AF, tax incentives, you’re actually doing a disservice to your business. By inflating your costs, you’re decreasing the implied value of your business. So in addition to cheating the government, you’re cheating yourself.
Legal vs. Lazy
It’s a slippery slope. You’re out and about and you need to buy office supplies and you don’t have your business credit card with you, so you use your personal one. At the end of the month, you reimburse yourself for those office supplies. And then you get a little lazy, and you start comingling more of your personal charges. Which lunch was for legit business, and which was personal? Laziness is the biggest obstacle to having clean books. Seriously. There shouldn’t be any question if an expense is for business or personal reasons, so I always tell clients to use specific cards and specific accounts for their business. Then, when you get your credit-card statement six weeks later, you don’t have to rely on your memory as to what the charge was for and whether you should be reimbursed by your business.
When someone wants to sell their business, we often work with them to “normalize” their financial statements for a buyer. When I say normalize, I mean add a little color to the numbers. Let’s say, last year you decided to make a sizable investment in a new software package. We’ll want say to a potential buyer, “Our profits were $100k, but that included a $25k investment in new software, so it would’ve been $125k.” That’s not a repeatable expense AND you’ll get the benefit of that new software as the buyer.
But let’s be honest, it looks pretty shady if you need to say, “I did a home renovation, but I pretended I was building an office at my house, and that’s what this one-time expense was.” What will they think of your character and your business acumen, and how will that reflect on your transaction? That may be more of a judgy thing than an actual business thing, but if you know me, it’s kind of one and the same – yes that’s side eye comin’ your way.
This can also come into play if you apply for a loan or even a credit card. If you need to show your financials to someone, you want to show the true cost of running the business. People don’t like it when you have to say: “But don’t count that. Oh and strip this out.”
You could be the best business in the world, but if they’re going to question one expense, they’re going to question all of them. Won’t that be fun?
Too legit to quit
Work with your CPA to take every tax deduction that’s legitimately available to you. But please remember this too, suppressing profitability for tax advantage can often be a short-term solution to a longer-problem that just repeats itself year after year. Pushing personal expenses through your business is NOT a cash management strategy, work with your tax professional and your CFO (hint hint: ME!) to develop more intentional tax and cash management strategies (More on this here.)
Take a good look at your books. Is everything you’re running through your business legit? If you don’t have the intestinal fortitude to do this yourself, I will be thrilled to come in and put your books to the test. I’ll even try not to be judgy, but no promises.