IRS Audit Warnings for Startup or Small Business Owners

The IRS is now capable of identifying factors that lead to audits more than ever, thanks largely to improved detection systems. If you run a startup or a small business, you may be singled out for several reasons. Corporate Business Solutions can provide, through one of our affiliated companies, tax assistance to entrepreneurs who have failed to put the proper systems in place to keep the owner’s personal expenses separate from the funds for the business. We highly recommend owners of small and medium-size businesses establish the necessary internal controls and systems to avoid getting in trouble with the IRS.  Here are some red flags for business owners to keep in mind to avoid getting audited by the IRS:

Self Employment – Being self-employed at your own startup or small venture naturally raises red flags at the IRS. Self-employed persons may file for more deductions for businesses, which attracts scrutiny. One of the prime triggers for IRS audits is owning a home where you take a home office deduction for running a business and claiming significant business expenses which may not be justified. If you are self-employed, you must keep business and personal expenses separate without exceptions.

Over-the-Top Home Office Deductions – Be careful about what you deduct as business expenses when you run a home office. Don’t try to claim deductions for very small expenses like paper supplies or buying a new stapler, for example, if you are using those items for your personal convenience as well. Only those things which are exclusively used for your business qualify for a business expense deduction. Home office deductions must be well justified. The IRS will want to know whether the home office is used exclusively for work and has specific rules for when the space allocated for a home office as a percentage of the home cost can be deducted. Keeping extra careful track of all business expenses will help you present strong evidence.

Writing off Hobby Expenses as Business Expenses – It is illegal to pass off a hobby as a business for tax purposes. However, some people may engage in hobbies as if they are businesses. If your hobby business is largely unprofitable, that would ring off warning alarms at the IRS. Your hobby could get classified as unprofitable home businesses, where you cannot claim certain business deductions.

Excessive Generosity – It’s common for even small businesses to make charitable donations and claim a tax credit. However, eyebrows will be raised at the IRS if you are particularly generous in one year more than in others. Do not inflate your charitable donations.  You must have documentation for all charitable deductions.  If you donate more than $500, you must file a form 8283.

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