While it makes financial sense to explore all your options for reducing your tax bill, you need to be careful. If your deductions look suspicious to the IRS, the agency might audit your business.
The IRS has switched its focus from large corporations to smaller business entities like sole proprietors, LLCs, partnerships and S corporations, said Jessie Seaman, former senior managing attorney at Tax Defense Network. In other words, Seaman said, your business could be under even greater scrutiny than your big competitors are.
Seaman noted that the IRS commonly looks for certain types of business tax deductions – such as those for home offices; meals, travel, and entertainment; vehicle use; and real estate losses – to make sure taxpayers are adhering to limits and regulations.
Similarly, Steven Aldrich, former chief product officer of GoDaddy and the former CEO of online accounting system Outright, reminded business owners to keep personal and business expenses separate. (The IRS looks for personal expenses reported as business expenses, he said.) And always report full, gross income before any fees, such as those for credit card processing, are taken out, he added.
If you receive an audit notice, read Business News Daily’s guide to handling an audit properly. Then consult your tax professional for the next steps.
Key takeaway: Reduce your odds of being audited by avoiding comingling personal and business expenses or taking egregious deductions.