If the idea of having your small business audited by the IRS strikes fear into your heart, you are not alone. A tax audit is an intimidating prospect, even for small-business owners who keep meticulous records. How can small-business owners avoid getting into trouble with the IRS?
Avoid Filing Errors
Before you submit your tax forms to the IRS, double-check them for simple clerical errors. An unclear digit on a social security number or tax ID or simple miscalculation when adding up deductions may be enough to attract the attention of the IRS.
Only Claim Legitimate Expenses
Business owners who claim excessive business expenses, especially those related to travel, meals, and entertainment run the risk of increasing their odds of being audited. While it may be tempting to fudge the numbers in order to decrease one’s tax liabilities, business owners should only claim legitimate expenses, and should keep all receipts well-organized.
Five Years of Losses?
While some unfortunate business ventures can legitimately claim losses for five years in a row, doing so is likely to make IRS agents question whether the business in question is little more than a hobby. Losses from hobbies can be deducted, but only up to the amount earned by activities related to the hobby.
Know Your Deductions
Business owners who have a vehicle that is used chiefly for business purposes can and should deduct their mileage, but excessive claims may raise suspicion, so business owners who spend a lot of time on the road should be prepared to back up their claims with proof.
Business-related travel expenses, including airfare, hotel stays, taxi fares, and tolls are 100% deductible, but small-business owners should be careful to only claim expenses related to trips which were primarily taken for business reasons. Deducting the cost of a Caribbean cruise for the family might seem like an artful way to save money, but unless the cruise involves a business seminar or something similar, proving its connection to business may be a difficult proposition.
Those who operate home-based businesses are sometimes intimidated by the idea of claiming the home-office deduction, but as long as the area being claimed is exclusively used for business activities, the legitimacy of this deduction is not difficult to prove.
Separate Business From Personal
As mentioned earlier, errors on tax forms can draw attention from the IRS. Such errors are less likely to be committed by small-business owners who keep their business and personal expenses separated. Not only that, but maintaining separate personal and business credit cards and bank accounts makes it easier to build business credit.