Responsible tax filing is the duty of every citizen of the United States, and filing accurately can save you a world of headaches if the IRS decides to subject your business to an audit. Being audited is a pain, and small business owners, in particular, are at risk, so take a few steps to protect yourself and maintain good financial standing in the eyes of the government!
Be careful what you deduct…
Evolution Tax Center is the first place to sing the praises of tax relief for small business owners, but we’re careful to specify what terms and conditions apply to taking these deductions. The reason is simple: inaccurate deductions can get you in trouble.
If you deduct the cost of a cell phone, for example, that you use often but not exclusively for business, that’s not a deduction you’re actually eligible for unless the phone is exclusively a business phone. These sloppy deductions can result in an IRS penalty.
…Especially if you deduct your car
This is a sub-point under the first one, but don’t claim your vehicle as a 100% business use car unless it truly is. This is a big IRS trigger since car costs and gas can be so costly.
Don’t round your numbers
When you report your income, don’t round anything up or down.
If you made $10,045.27, report that exact number, not $10,000. The IRS may think that since you were rounding in this one area, other areas of your tax return may have been inaccurate as well.
Be extra careful if you have year over year losses
Some businesses take time to get off the ground, but if you’re reported a loss for two or more years, the IRS may think you’re claiming deductions you’re not eligible for just to avoid paying taxes. If you’re simply experiencing a few bad years, that’s not a crime of course, but take special care with your taxes if you’re in a rough patch.
Keep good documentation if you file a Schedule C
It’s widely believed that the IRS scrutinizes Schedule C returns, which allow small businesses can claim deductions that lower their taxable income, more closely than other types. Don’t let this stop you from claiming your deductions, but do back them up with good documentation.
Mind your business entertainment deductions
This is a deduction that is commonly abused, so if the IRS sees you’re writing off a ton of these, they may suspect you of taking personal trips and claiming them as business related. If you’re writing off these expenses, keep a record of the where, why, and with who of the expense, as well as how it relates to your business. Additionally, if the cost was above $75 while traveling, you should keep the receipt as well.
Consider incorporating your business
If you file a Schedule C as a self-employed worker, incorporating your business will reduce your chances of being audited. Small businesses are more commonly targeted by the IRS than LLC’s, and incorporating your business isn’t as hard as you might think.