Business owners are the groups of people who are subjected most to tax issues and being audited by the IRS. There are many different things that can go on for business owners and there are complicated situations that need to be handled properly to avoid red flags with the IRS. We have created a list of the top 10 tax issues to beware of for your account business so you can better help your clients.
The IRS will notice if you have a “business” vehicle that you claim 100%. This is a problem because many business owners, especially smaller ones, do not have a separate personal and business vehicle. If you do have separate vehicles for business and personal use, it’s completely acceptable to claim 100% use on the business.
Your Home Office
Most business owners, including small business owners, have a home office that they work out of even if they have an actual office. If you claim too much for your home office, you could raise a red flag at the IRS. While it is totally acceptable to have one, just be aware that this could make your chances of an audit increase.
Be sure that you are honest with your losses. The IRS does not like to see businesses that are constantly losing money instead of making it. This could raise a red flag where the IRS thinks that your business is more of a hobby.
Business vs. Hobby
About that: the IRS loves businesses; the IRS does not love hobbies. If you are continuously claiming losses for your “business” year after year, the IRS can clearly see that your business is not doing any business. They would then consider this a hobby and would likely audit you to make sure that your business is legitimate and not just a hobby.
Cash Over Card
With all of the easy ways available to get a card reader thanks to technology, there is no way that anyone should be dealing only in cash…other than to be dishonest on taxes. While you can still accept cash, make sure that you take some card purchases to avoid the IRS getting suspicious.
All businesses have certain things that they can deduct from their taxes, but taking too many deductions is a major issue and could be grounds for getting audited. Make sure that you only take deductions that you are entitled to. Pro tip: deducting your new MacBook for office work is a great idea; deducting your new MacBook, iPad, home theater system, 70-inch television and surround sound is a bad idea.
Donating It All
While donating throughout the year can help lower the amount that you owe in taxes, don’t donate everything that you earn. Not only will you be left without money but also the IRS will smell something fishy because nobody truly donates all of his or her money.
Being Too Successful
Wait, what? Yes, continue being successful with your business, but be aware that the IRS could audit you if you are wildly successful. The chances of being audited go up by around three times when you make more than $200,000. They triple again when you make more than $1 million. Bonus: your chances will be increased even more if you make a small amount of money one year and have a huge fluctuation in the next tax year.
Working and Owning
If you have 1099s and W-2s, you will be more likely to get audited. The IRS understands that many people still have to work while starting a business, but this could still raise red flags.
Be meticulous when you are doing your taxes. If the IRS notices some mathematical mistakes, they could think that you did your taxes hastily and would want to make sure that everything was properly done- leading to an audit. If you are not confident with your math or tax preparation skills, always contact a professional for help.
After reading our list, do you think that you’re ready to do taxes for business owners?
If you’re still trying to develop your business plan and would like more information check out how to start an accounting firm business.