3 Red Flags The IRS Looks For That You Should Avoid

One of the chief benefits of being a small business owner is the ability to responsibly take advantage of some of the breaks the tax code gives you.  The savings and deductions available can offset the income of an entrepreneur and reward small business owners.  However, without professional bookkeeping services, it can be very easy to send red flags to the IRS.  When that day comes, your better have organized bookkeeping for your audit!

 

We have done some of the hard work already and have put together some of the top 3 Red Flags the IRS looks for that you should avoid.

 

• Using Your Vehicle 100% For Business Purposes

Sure, you use your vehicle for business purposes.  Maybe you go out to coffee with a client.  Then you drive to deliver pick up some inventory from a vendor.  After driving to lunch with a business partner, you run by the school to pick your kid up and drop her off at home.

 

While the tax deductions for using your vehicle for business is very generous, 57.5 cents per mile, you need to be careful with claiming use.  Unless you truly only have a vehicle for business purposes, it is unlikely that your primary vehicle is only used for business purposes.  Be sure to use professional bookkeeping services and tools to make sure you parse out work miles from personal miles.

 

Also important to note is that no deduction is available for commuting from your home to your place of business.

 

• Cash Intensive Businesses

When you first start your business, it does not seem to matter how a customer pays you, whether cash, credit cards, whatever- you just want to get paid.  The problem though is that as a business matures, so should the payment systems.  If you still operate on a cash basis but post large topline sales, you are asking for an audit.

 

Cash is too easy to move and possibly hide from auditors, hence why there is greater oversight over these businesses.  Bookkeeping standards and making sure to keep tight books will help, but this is still a red flag you want to avoid.

 

• Posting Excessive Business Losses

Basic accounting and IRS procedures allow for the business losses to help offset business income.  This is a tax break as a reward for the small business owner first starting out.  The problem though is when your business continues to post losses.  Especially if reported income is growing and losses rise as well to cover the gains.  Bookkeeping services can help provide validation of your business activity, but an audit is definitely not a pleasant experience.

By maintaining a coordinated, cloud-based strategy for your bookkeeping needs and staying organized through a professional bookkeeping service, you should be able to avoid most of these pitfalls easily.

The important thing though is to make sure that the tax tail never wags the dog of the business.  Take advantage or legal deductions, but focus mostly on running your business and serving your customers.