Blogs >> Entrepreneurship >>
Stupid Mistakes That Can Cause an IRS Audit
Your business return is a report to the IRS and to your State Department of Revenue. It says a lot about your business and about you. But it also says one really 050-682 important thing of which you might not be aware.
Your business return says whether you should be audited or not.
Here's a brief outline of eight mistakes that you want to avoid on your business return. For more information on these mistakes, and how to avoid them, please see "Smart Business Stupid Business" by Diane Kennedy CPA and Megan Hughes.
Mistake #1: Selecting the wrong business type for your business.
There are some basic rules when it comes to selecting the right business type for your business.
Don't put appreciating assets inside a corporation. There are a few (very few) instances where you might need to use a corporation to hold assets like real estate, but for the most part - don't do it!
Think about the tax election for your LLC. If you go with the basic default of Sole Proprietorship (single member) or Partnership (multi-members) you might not get what you want.
Definitely get good tax advice before you make important elections with your tax return.
Mistake #2: Selecting the wrong NAICS code for your business.
The IRS will compare your selected NAICS code with other businesses with the same code. If your business is being compared with a different type, you'll look off and that's a bad thing when it comes to the IRS.
Mistake #3: Failing to elect to amortize your start-up costs.
You get a choice with start-up costs - amortize them over 15 years or taking an election to expense up to $10,000 in cost in the first year. But you have to make the election on your return!
Mistake #4: Not selecting the correct accounting methods.
There are three types of accounting methods: cash, accrual and hybrid.050-683 It's amazing how many get this one wrong.
Mistake #5: Not taking the full amount of loss in the start-up year (or for that matter any growth year).
It's easy to get lulled into a trap of "I don't owe taxes, so I don't need to look for deductions." The problem is that when the business starts being profitable you've lost out on possible carry-forward losses. And if it's not profitable and you have to shut it down, you've lost out on possible losses.
Mistake #6: Not reporting inventory for a retail business.
This is a huge red flag for a retail business. If you sell stuff, you can't take an immediate deduction for inventory you buy. Inventory is an asset, not a deduction. When you sell it, it moves from asset to cost of goods.
Mistake #7: Making a mistake with your salary.
There are two things you can do wrong:
Pay yourself a salary when you're in a structure like an LLC or LP or
Not pay yourself a salary when you're in a structure like an S Corporation.
Mistake #8: Not setting up an audit defense.
There are five things that we always do at my full service tax practice, US Tax Aid Services when we prepare a tax return for our clients. We make sure to:
Avoid Red Flag Triggers on the initial filing,
Be 050-664 over-achievers when it comes to disclosures,
Keep overall reporting consistent as far as line items (unless obviously wrong)
Coach our clients on what to keep, how long and why, and
Proactively react to any IRS inquiry or audit notice.
In today's audit climate, it's not just about audit defense. It's about audit survival!
Your business return says whether you should be audited or not.
Here's a brief outline of eight mistakes that you want to avoid on your business return. For more information on these mistakes, and how to avoid them, please see "Smart Business Stupid Business" by Diane Kennedy CPA and Megan Hughes.
Mistake #1: Selecting the wrong business type for your business.
There are some basic rules when it comes to selecting the right business type for your business.
Don't put appreciating assets inside a corporation. There are a few (very few) instances where you might need to use a corporation to hold assets like real estate, but for the most part - don't do it!
Think about the tax election for your LLC. If you go with the basic default of Sole Proprietorship (single member) or Partnership (multi-members) you might not get what you want.
Definitely get good tax advice before you make important elections with your tax return.
Mistake #2: Selecting the wrong NAICS code for your business.
The IRS will compare your selected NAICS code with other businesses with the same code. If your business is being compared with a different type, you'll look off and that's a bad thing when it comes to the IRS.
Mistake #3: Failing to elect to amortize your start-up costs.
You get a choice with start-up costs - amortize them over 15 years or taking an election to expense up to $10,000 in cost in the first year. But you have to make the election on your return!
Mistake #4: Not selecting the correct accounting methods.
There are three types of accounting methods: cash, accrual and hybrid.050-683 It's amazing how many get this one wrong.
Mistake #5: Not taking the full amount of loss in the start-up year (or for that matter any growth year).
It's easy to get lulled into a trap of "I don't owe taxes, so I don't need to look for deductions." The problem is that when the business starts being profitable you've lost out on possible carry-forward losses. And if it's not profitable and you have to shut it down, you've lost out on possible losses.
Mistake #6: Not reporting inventory for a retail business.
This is a huge red flag for a retail business. If you sell stuff, you can't take an immediate deduction for inventory you buy. Inventory is an asset, not a deduction. When you sell it, it moves from asset to cost of goods.
Mistake #7: Making a mistake with your salary.
There are two things you can do wrong:
Pay yourself a salary when you're in a structure like an LLC or LP or
Not pay yourself a salary when you're in a structure like an S Corporation.
Mistake #8: Not setting up an audit defense.
There are five things that we always do at my full service tax practice, US Tax Aid Services when we prepare a tax return for our clients. We make sure to:
Avoid Red Flag Triggers on the initial filing,
Be 050-664 over-achievers when it comes to disclosures,
Keep overall reporting consistent as far as line items (unless obviously wrong)
Coach our clients on what to keep, how long and why, and
Proactively react to any IRS inquiry or audit notice.
In today's audit climate, it's not just about audit defense. It's about audit survival!
|
|
