Is your business inadvertently flying these IRS red flags?
Taxes are a major challenge to many, if not most, small business owners, and the last thing you want to do is send up the worst IRS red flags.
What might trigger an audit? What things are tax deductible? There are so many questions. With so much to do, it can be easy to make a critical mistake on your small business return. Here are five of the worst mistakes you can make and how to avoid making them.
IRS Red Flag #1: Improperly Deducting Your Startup Costs
Small businesses often assume they can deduct all costs when starting up. This is not permitted, however, until you have had your first sale.
Your business expenses before your first sale are startup costs. These costs may not be deducted until after the first sale. They are then deducted over the next 15 years. You may choose to deduct the first $5,000 of your first-year startup costs, and an additional $5,000 in organizational expenses. But you can deduct these only if your total startup costs amount to less than $50,000.
To avoid this IRS red flag: If you opened your doors to business in 2014, be sure you’ve kept all your receipts for business purchases. Check the latest IRS regulations to be sure your expenses qualify as deductions.
IRS Red Flag #2: Failure to Maximize Medical Expense Reimbursement Plans
If you work with your spouse, how are you categorizing and paying her/him? If you don’t claim your spouse as an employee, you’re missing some major medical expense deductions via a Medical Expense Reimbursement Plan (MERP). MERPs allow for tax-free coverage for your employee’s medical expenses. Not taking advantage of this can upset your spouse’s chance to create a MERP which allows them to deduct 10% of their Adjusted Gross Income limitation. Both yours, your spouse’s and your children’s medical expenses may be tax-deductible.
To avoid this IRS red flag: If your spouse does work with you, treat her or him like any other employee. Use time sheets and make a complete paper trail. Your spouse doesn’t have to work full-time, but there needs to be evidence that he or she does work there.
IRS Red Flag #3: Mixing Business and Pleasure
It may seem simpler to lump all your personal and business expenses into one, but it is actually much more time consuming and confusing to do so. Many business owners fall into the trap of running expenses through their business, those which are obviously personal expenses, like; home rent, pet food, groceries, clothes and other personal items. This is a good way to set off some IRS red flags on your trail and incite the dreaded audit.
To avoid this IRS red flag: Keep business and personal expenses separate. Have a separate business account to make it easier. Don’t use your business card for personal things, and if you do (but don’t), be sure not to claim them on your taxes.
IRS Red Flag #4: Selecting the Wrong Business Structure
Too many small businesses make the unfortunate mistake of filing as a C Corporation. That will mean double taxation for your company. Because a corporation’s profit is taxed to that corporation as it is earned, and then again to shareholders (that means you) when the profit is marked as dividends, you will have to pay your taxes twice.
To avoid this IRS red flag: Research tax-friendly business structures for your small business. The S Corp business structure is a good choice for small businesses as you will only pay taxes through your personal taxes, which means that you only have to pay once, and you will pay less.
IRS Red Flag #5: Not Paying On Time
One of the biggest no-nos that small businesses fall prey to all the time is paying their taxes late. There’s a simple solution to this, do your tax preparation early, and file on time.
Don’t let these or other common IRS red flags sink your business. To learn more about all the tax pitfalls waiting to snare well-meaning small business owners, contact the tax experts at Incompass Tax, Estate, and Business Solutions.