As interest rates increase and prices get higher you may find you cannot afford to pay the salary and wage increases that you would like to. And the cash squeeze on employees may increase the risk of stealing in your business as employees try to make ends meet.
Money stolen from your business poses an interesting question from an income tax point of view.
The question is can you deduct the stolen money from your taxable income.
You clearly do not spend such money deliberately in order to trade and derive income (two of the main requirements that must be fulfilled to be able to deduct expenditure and losses from your business income). However, you would not have lost the money were it not for the fact that you are conducting the business operations.
If you are able to show that the risk of your employee stealing cash from your business is "inseparable from, or a necessary ingredient of the carrying on of the business, it would be reasonable to regard the loss as part of the cost of performing the business operations for the purpose of earning income".
The quote is from the judgment in a tax case involving the deduction by the taxpayer of money his clerks had stolen in his business and which he had to reimburse to his client.
The taxpayer was allowed to deduct the amounts because it was felt that the risk of the loss due to the theft was inseparable from the nature of his business.
Another situation which the courts looked at involved employees of the business who were responsible for banking the cash, stealing some of the cash. Again it was seen as an unavoidable risk that the business took that resulted in the cash being stolen and again the taxpayer was allowed to deduct the loss from taxable income.
In another situation a business had set up an operation in another area, and had appointed a manager to manage and operate the business. The manager embezzled funds. The court ruled that the taxpayer could not deduct the loss because it was not an inevitable and natural cost of the business.
What's the difference, you are probably asking.
In the latter case it was considered that the position of the manager was such that you would not expect him to embezzle the funds, whereas in the other cases, the natural consequence of the need to employ clerks was the risk that such employees might steal funds.
The moral of the story is that you need to make it as difficult as possible for your employees to steal by adopting all the accounting control measures that you can.
However, if you should be in the unfortunate position that your employees have stolen from you, you need to ask yourself whether the type of operations you run are such that the risk of your employees stealing is inevitable.
If you have experienced losses in your business due to theft by employees, it's important that you recognise that you may be able to deduct those losses for tax purposes, but not necessarily.