You’ve finished preparing your small-business taxes, right? No? Don’t worry — I’ve got some last-minute advice to lessen your chances of getting audited as you rush to the wire before April 15.
Frankly, the likelihood of getting audited is pretty darn slim in any case. In fact, small incorporated businesses (Subchapter S) had less than one-half of 1 percent chance of being audited in 2008, according to the IRS. But having been audited once, I can tell you, you want to avoid the hassle even if you come out squeaky clean (like me).
With some help from the accounting firm BDO Seidman, I’ve put together my list of the top nine triggers for audits of small businesses.
Do’s and don’ts:
1. Hiding income. Years ago, I learned gas station convenience stores were one of the most audited businesses. Why? Lots of people pay with cash. If you get paid in cash, rather than by check or credit card, it’s tempting to just ‘forget’ to declare some of that income. That’s a huge IRS no-no. Don’t.
2. Making more than a million dollars. Have an adjusted gross income of more than a million dollars? You’ll have the highest chance of getting audited. In 2008, according to the IRS, they audited 5.6 percent of millionaires’ returns, compared with 2.9 percent of those making more than $200,000, and less than 1 percent of those making less than $200,000. But, heck, if you can clear a million dollars profit, take the audit. A definite do.
3. Mixing personal and business expenses. It’s tempting to write off your new living room furniture or that trip to the Caribbean as a business expense but the IRS certainly frowns upon that. Don’t.
4. Entertaining. Another area where personal and business expenses are likely to be construed as intertwined. Also, the IRS doesn’t want to see excessively lavish parties (except, it seems, from huge banks getting TARP money, but that’s another story). Remember, you can only take 50 percent of entertaining and food expenses as a deduction. Nevertheless, small businesses need to be out there talking to customers over lunch or dinner, at a ballgame or golfing. Most entrepreneurs don’t entertain nearly enough. Do.
5. Losing money more than three out of five years. The IRS is on the lookout for people writing off hobbies as businesses. They want to see that you’ve at least had the intent to make a profit. Don’t.
6. File a Schedule C return. If you’re a sole proprietor, you’ll file a Schedule “C’’ — Profit or Loss from a Business — as part of your 1040 form. BDO Seidman says the IRS is scrutinizing Schedule Cs more closely this year, so make sure you have proper documentation. But unless you’re incorporated, you’ll need to file this form. And according to an SBA report released just April 2, sole proprietors pay half the effective tax rate of S corporations (13.3 percent versus 26.9 percent). Do.
7. Taking the home office deduction. If you work at home, remember you need a section of your house exclusively used for business to qualify for a home office deduction. The IRS particularly likes to challenge this. I worked at home for 14 years and never took this deduction. Be careful.
8. Using your car for business. Like entertaining, this is another area the IRS thinks has the possibility of being misused. You’re less likely to be audited if you have a separate personal car. But you’ve got to see customers face-to-face to keep them loyal. And this year, the mileage rate deduction was increased: 50.5 cents per mile from 1/1/08-6/30/08 and 58.5 cents the rest of the year. Get out there. Do.
9. File at the last minute. Since fewer returns are filed early, BDO Seidman claims you’ll have a lower chance of being audited if you file closer to deadline. So thumbs up on your procrastination! Do.
Rhonda Abrams is the author of “Six-Week Start-Up” and “What Business Should I Start?”
