If you're in your first couple of years as a small business owner, tax season may still feel a bit intimidating to you. You might feel like you're still just stumbling through the process and hoping for the best. Unfortunately, this can lead to tax audits that may prove costly if you've claimed unqualified deductions. There are a few common mistakes that can trigger an IRS audit, and your tax services professional can help you avoid them. Here's a look at some of the most common issues for small business owners.
Claiming Excessive Meals Deductions
Whether you're claiming that you're hosting potential clients or you've heard that you can claim dinner out as a business expense as long as you talk business at some point, it's important that you're practical about your meal deductions. Talk with a tax service professional about what types of meal expenses qualify for business deductions and make sure that you keep meticulous records of each one so that you can support the deduction if you are audited. The more information you have about the expenses to prove their reasonability and eligibility, the better it will be for your audit.
Using The Home Office Deduction Incorrectly
The home office deduction is a great way to cut costs when it comes to your tax liability, but it's not a one-size-fits-all deduction. There are strict regulations that define who can qualify for the home office deduction and how much you can write off. Mistakes with the calculations or your eligibility could lead to costly penalties. A tax professional can guide you through the questions that help determine if you qualify for the deduction.
Claiming Consecutive Losses
While annual operating losses are often expected in the first year or two of a business and when there are economic struggles, claiming consecutive losses for several years with no potential improvement or resolution is often an audit flag. You'll have to provide documentation to support your accounting records and may be asked to explain why you continue operating a business that is persistently operating at a financial loss.
These are just a few of the many things to know when it comes to filing taxes for your business operation. Avoid some of the most common IRS pitfalls with your small business by working with a tax services professional each year to complete your financial statements and tax filings.
To learn more, contact a tax service professional in your area.