How to stay out of tax trouble

Business owners dread tax audits. Dealing with the worry, documenting expenses and explaining unusual circumstances add stress to the already hectic life of an entrepreneur. How can a business owner stay out of tax trouble?

The Internal Revenue Service collects taxes for our country and administers the tax code. The IRS audits a very small percentage of business taxpayers but no one wants to be picked. A business owner can’t be absolutely certain that an audit can be avoided but here are some common-sense tips to help.

• Fuzzy claims for auto expenses are a frequent red flag for IRS auditors. An owner is expected to have written, contemporaneous documentation for claimed mileage. That means a written record, prepared at the time of the trip, with information about the visit — who, what, when, where. If you’re estimating mileage and don’t have a written record, you’re inviting notice. An app on your smart phone can document your mileage but make sure that you download the information and have a printed copy. When you’re audited three years from now, you will be glad to have the paper.

• The IRS is reviewing social media for a business to compare the owner’s lifestyle to the reported income. Posting photos of a fabulous vacation or a new house while reporting poor business results can attract unwelcome attention from the IRS.

• Using contract workers instead of paying employees is another area of focus for the IRS. Be sure that you understand what circumstances make someone your employee so that you’ll classify workers properly. The IRS knows what is common in your industry, so if your expenses don’t line up with your competitors, your return can get flagged.

• If your business consistently shows a loss, especially if it is an area that could be considered a hobby, you risk having IRS disallow your expenses. An example would be opening a business as a fishing guide, then buying a new boat and other equipment and deducting the costs, but consistently having very few customers. The IRS is likely to decide that you’re funding your own recreational activities and disallow your business deductions.

Taxes are part of the expected expenses of a business. Your tax professional can help keep you out of tax trouble.

Let the consultants at the Louisiana Small Business Development Center at McNeese State University help you with the difficulties of running your small business. For 35 years, the LSBDC at McNeese has worked with entrepreneurs and business owners who are looking to start or grow their small business. Visit www.lsbdc.org/msuto learn more about us. For no-cost assistance with your business, call 337-475-5529.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration and Louisiana Department of Economic Development. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarily reflect the views of the SBA.

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Donna Little is the director of the Louisiana Small Business Development Center at McNeese State University. Contact her at 475-5945 or dlittle@lsbdc.org.