Did you know that something as simple as a math error or an unsigned form could invite unwanted attention from the IRS? Even if you have no intention to evade taxes or find loopholes, if there’s something on your return that makes the IRS take a second look, an audit of your business may be inevitable.
When it comes to dealing with the IRS, honesty is always the best policy. Learn some of the top audit triggers for businesses — and tips on keeping Uncle Sam at bay.
Excessive deductions. As a business owner, you’re entitled to deduct certain expenses to lower your taxable income. But don’t overdo it. If your deductions appear disproportionately high compared to your income, the IRS might suspect you’re padding your expenses. So what constitutes a legitimate business expense? The cost of goods sold, rent, salaries and business-related travel are generally deductible. The key is to keep accurate records of all your business expenses, making sure every deduction is backed by appropriate documentation like receipts, invoices or mileage logs.
Consistent business losses. It’s normal for businesses to experience losses, but reporting losses year after year can catch the IRS’s attention. They might suspect that your business is more of a hobby — and hobbies don’t qualify for business tax deductions. To avoid this trigger, you must be able to demonstrate what’s called a profit motive. For example, this could be a business plan indicating how and when you expect to become profitable, or records showing that you’re treating your business seriously by maintaining regular hours, keeping accurate financial records or investing in professional development.
Sizeable charitable donations. If you’re not generating a significant amount of income, any large charitable donations can raise eyebrows. Be sure to document every generous gift with related receipts and any supporting materials to help prove you have the best intentions. And remember, contributions must be made to qualified organizations that meet IRS guidelines for your business to claim a deduction.
Home office deductions. In the post-pandemic world of work, more people than ever are clocking in from home. But the IRS knows that even if you’re running your business from home a few days a week, that doesn’t mean you’ll necessarily qualify for the home office deduction. Do your due diligence and ensure your home office fits the bill as your principal place of business, meeting these IRS guidelines.
Large cash transactions. Dealing with wads of cash? The IRS is watching. The agency requires businesses to report cash transactions exceeding $10,000, and all businesses must comply with reporting requirements. It’s not just cash transactions that need to be reported. The rule applies to cash equivalents like cashier’s checks, money orders and bank drafts, too.
Personal use of a work vehicle. If you think you can pick up the kids at school or run errands in your business vehicle, the IRS may be on to you. You may derive tax benefits for your vehicle’s business use, but if you’re also using it for personal business, you’ll need to account for it on your taxes. Keep a detailed record of your mileage and gas costs pertaining to your vehicle’s usage. Keep a calendar to record the purpose and the mileage of each trip, every time you get behind the wheel.
As a business owner, your focus should be on growing your business — not worrying about an audit. Reach out to the CPAs at Magone & Company to ensure you’re on track for IRS compliance.
This information is provided for educational purposes and should not be construed as financial or legal advice. Please consult your accountant or attorney for advice specific to your situation.