Filing taxes is one of the least fun tasks that come along with this adulting gig we all have. Yet we all partake in this “fun” because it is required of us. And also because there can be some pretty hefty penalties if we don’t! Last week we discussed some of the common areas know to trigger flags and audits on small business tax returns; and how if you can avoid them, your odds of an audit will likely be reduced. This week, we’ll touch on a few more things you should pay special attention to when filing your small business taxes.
Reporting Losses Year After Year – You can be sure that the IRS will take notice if you claim that your business is taking a loss year after year. More flags go up if you report multiple years of losses on a Schedule C. If you are operating a business that reports a loss year after year, the IRS might assume that you are taking deductions that you are not entitled to in order to avoid paying taxes. Losses are allowed if you are operating your business with the intention of making a profit. If you are not, you might simply have a hobby instead. Much like a business, your income from a hobby must be reported, but deductions in excess of hobby income are not allowed.
Home Office Deduction – This deduction raises a flag right out of the gate. The IRS has had much success in proving it is not an eligible expense for many small business owners. If you do qualify for this deduction, you may be eligible to deduct a percentage of your rent, real estate taxes, utilities, insurance and other costs that can be properly allocated to the home office. But beware – in order to be eligible, you must use the space regularly and exclusively for your business. That means if your office is in a corner of your guest bedroom it will not qualify because it does not meet the exclusivity test.
Claiming 100% Business Use of Vehicle – Business use of your vehicle can be a deductible expense. You’ll have to choose between the standard mileage rate and taking actual vehicle expenses as a deduction. Don’t report both as an expense unless you want the IRS to come knocking. You will have to keep an accurate mileage log no matter which option you choose. Heads up, using a vehicle 100% for business is rare and report as such will raise flags, so estimate your business use carefully using your mileage log.
Now for some good news! According to the IRS 2017 data book (Table 9b), during the fiscal year 2017 a mere .62% of individual income tax returns were audited. That percentage is down from the .70% of individual income tax returns that were audited in fiscal year 2016. That’s actually great news! Do you prepare your tax return yourself? Or do you have a tax accountant helping you? Either way, take some time to review your tax return before sending it off to the IRS. By keeping these common audit flags in mind you may avoid being part of that <1%. It is your business afterall; and no one knows your business better than you do.