Top 5 Tax Items that Could Get Your Small Business Audited
Nobody really likes doing taxes (unless you’re an accountant), and taxes can be especially stressful if you’re a small business (unless you run a small accounting firm). With a small business you want to write off as much as possible, but you obviously don’t want to get audited. So how can you balance between the optimum write off amount and the non-audit safety zone? Here are 5 items to look out for on your small business taxes, to avoid getting audited.
1. Make sure you’re using the right forms
This may seem like a total no brainer – duh, you have to use the right form for your taxes, right? But there are at least 5 different forms that you could use for your small business, depending on the structure of your company. Here is a rough breakdown:
- If you run a sole proprietorship, you need to report your business expenses, losses, and income on a Schedule C form that is attached to your personal income tax return.
- If you have a partnership, you need to report your business expenses, losses, and income via Form 1065.
- If you have an LLC that is treated as a sole proprietorship, you should attach a Schedule C form to your personal income tax return.
- If you have an LLC that is treated as corporation, you will need to file a corporate tax return using Form 1120
- If you have an LLC with S Corporation Status, use Form 1120S
2. Office Equipment vs. Office Supplies
Even experienced small business owners can get caught up on this one… What exactly is the difference between office equipment and office supplies? Office equipment (also known as capital expenditures) covers items that will last your business longer than one year, such as computers, desks, chairs, software, etc. You can write off up to $500,000 worth of new equipment per year using the Section 179 deduction. Office supplies (stuff that would get used up during one year, such as staples, paper clips, etc.) can be deducted as office expenses, too. Just remember to save your receipts for everything that you deduct!
3. Deducting your Home Office
A home office is generally considered to be a giant red flag for the IRS to audit your small business, but if you do it correctly, and you’re genuinely eligible for the deduction – you should go ahead and take it! There are two ways you can deduct your home office:
- Add up all the costs of your home office, including rent/mortgage and utilities, and then multiply that number by the percentage of your home that is dedicated to your office.
- Take a simple deduction of $5/square foot of office space (this way has a $1500 cap, so you could end up getting a smaller deduction than you deserve).
In order for your home office/office space to qualify for the deduction, it has to be a dedicated area in your house that is used only for your business – and nothing else. AND you must be able to prove that it is solely for your business.
4. Travel/Entertaining Expenses
This is another area where small business owners sometimes toe the “audit line.” Some travel expenses are deductible, while some are not. Likewise, some entertaining expenses are deductible, while some are not. A whole article could be written on what you can and cannot count as business expenses, but these are the main things that can be deducted:
- 50% of meals (as long as business was discussed, and the meals are not considered “lavish” or “extravagant”)
- 100% of travel costs (as long as the primary purpose of the trip is for business)
Again, be sure to keep receipts for everything, and keep notes of business meals, such as who you met with and what was discussed. For a more detailed list of expenses that can be deducted, see IRS Pub 463.
5. Overdue Taxes
We get it, small business owners are busy – so it’s totally understandable that April 15th can sneak up on you before you get a chance to even gather your receipts. In this case, it’s better to file for an extension than to rush to meet the deadline (and possibly make an audit-worthy mistake).
Keep in mind however, that even if you have an extension to file your taxes, you don’t get extra time to pay. So if you think you will owe money on your taxes, go ahead and send an estimated payment along with your extension request. If you don’t pay on time, you could be charged for extra penalties and/or interest when you finally file your taxes.
Overwhelmed yet? Well, don’t be. Everybody has to file their taxes every year, and MOST everybody manages to do it. If you’re really overwhelmed, consider paying someone to do your taxes for you. The price you pay will be well worth the peace of mind you’ll have knowing your taxes are done for the year!