This post is part of the Bible and Business series on Christian ethics for Christian Business Owners.
This ethical situation is created when the owner commingles business and personal expenses. As a result, expenses that would normally be personal expenses, such as leasing an automobile, become business expenses that reduce taxable income because the owner owns a business through which the owner can create tax write-offs.
Description of the Problem: Under section 162 of the Internal Revenue Code, expenses that are paid or incurred to support the trade or business are not taxed as part of net income. The general principle is that the costs of producing income should not be included in the amount upon which the income tax is levied (Hildebrandt and Steckmest, 1974:636). Some expenses can be classified as personal or business in privately held businesses. Ethical problems arise when business owners attempt to “partially finance personal expenses by mixing such expenses with business costs and deducting them from gross income pursuant to section 162” (Hildebrandt and Steckmest, 1974:637).
An example of this dilemma is an owner who purchases a high-end tablet that the owner will use both personally and professionally. The general rule is that if the laptop is going to be used 75% for business, then the deduction should be 75% of the cost, not the full cost (The Accounting Hub, 2020:Online). Yet, most owners will write off the full amount to create a lower taxable income. Deducting 75% of the cost would be ethical, but 100% would be unethical.
Another example is the Section 179 deduction. In years past, when a business purchased large equipment that cost a substantial sum, for example, $100,000, the business was allowed to depreciate $20,000/year for five years (these numbers are examples only), making the cash outlay difficult for small business owners. Section 179 deduction allows a business to write off the entire purchase price in the current tax year, lessening the negative effects of the cash outlay on the business (Section179.0rg).
One of the more popular uses of Section 179 was the deduction for larger vehicles. While the rules for qualifying equipment have been tightened in the last few years, many business owners who would have otherwise never purchased a truck were doing so and then claiming they needed the truck for business purposes so they could deduct the cost of the truck to lower their taxable income. Generally, using a tax deduction in a way not intended by the lawmakers to gain an unintended benefit is unethical. Just because it is legal does not mean it is ethical.
Type: This type of ethical decision is Stand up for Ethics
Filter: When an owner unethically reduces the owner’s taxable income to pay less in income taxes, the owner is unloving toward other citizens in the jurisdiction where the owner lives. It is a form of selfishness and greed, two qualities which never show love for God. When the owner does not pay the tax the owner should have, an additional burden is transferred to others who must make up the difference by paying more than they ought otherwise to have paid so their government can continue operating efficiently.
With reference to the Ten Commandments, when an owner unethically creates tax deductions, the owner is stealing from others in society and giving false testimony regarding the owner’s need for the deduction.
Again, it does not matter if the deduction is legal. What matters is if the deduction is ethical. If the deduction is not used to help generate revenue for the business, then the deduction is likely unethical, even though the deduction might be legal.
Correct decision: In the case of the laptop, the owner should deduct only 75% of the cost of the laptop as a business expense. In the case of a Section 179 deduction, the owner should refrain from purchasing a truck unless a truck is genuinely needed to create income for the business.
Bill English, Publisher
Bible and Business
