Small Business Corporations – Be Careful with Your Tax Deductions! Tax Filing

small business tax deductions ,It is learnt that IRS will soon shift its audit focus from Large Corporations (C-Corps) to Small Business Owners (S-Corps/Partnerships/Independent Contractors), especially Pass-Through Entities.  Pass-Through Entities are the entities in which the Entity does not pay any tax but the members of such entities will do pay tax on their Individual Returns.

The reason behind IRS drifting its focus to Pass-Through Entities is that IRS found that many of the business expenses incurred by these entities are of personal in nature which they falsely claim as Business Expenses on their Business Tax Return.

In order to have a hassle-free tax filing experience and ensure long-run tax creditability of your business, it is important that every Small Business Owner will try to adhere to the following guidelines suggested by our Tax Consultants:

  • Avoid Cash Payments

  • Do not mix Your Personal & Business Bank Accounts

  • Ensure Proper Record Keeping

  • Draw Reasonable Salary

Avoid Cash Payments

The chances of getting audited by IRS is higher if you do a lot of your business payments in Cash. It goes without saying that if you receive more of your business income/receipts in Cash, the chances of IRS attacks are almost higher. You should always try to use Checks/Cards to support your expenses or receipts and avoid using Cash, except for certain ordinary and necessary petty business expense.

Do not mix Your Personal & Business Bank Accounts

This is one of the most common mistakes made by a large number of small business owners. Keep your business expenses for business purpose and don’t use your personal bank account to pay for them. Having two separate checking accounts for both business and personal purposes is very important. You can have more than one checking account as well for your business purposes, but they should be used only for business purposes and not for personal purposes.

Ensure Proper Record Keeping

Have a clear track of your incomes and expenses. You can use at least an Excel Spread Sheet to track all your incomes and expenses, if your business is too small to use an accounting software like QuickBooks, Peach Tree, etc. for recording day-to-day incomes and expenses of your business. If you are a medium sized business, it is advisable that you have your accountant do all this work for you while you focus on your business. Having proper records will also save you in times of audits/notices from IRS, when the Tax Authorities would like to vouch the actual expenses claimed on your tax returns.

Draw Reasonable Salary

The IRS requires you to earn reasonable compensation for the type of work that you’re doing. As a guideline, the government suggests choosing an amount similar to what another business would pay someone to do what you do. Owners of Pass-Through Entities have come under increased scrutiny of the IRS over the past several years, as they usually prefer to take withdrawals rather than Salary to avoid paying the associated payroll taxes. One of the largest financial risks to entrepreneurs is penalties and interest for incorrect payroll-tax reporting. Deciding how much to pay yourself, and whether to take the money as a salary or as a draw, requires careful consideration. You may consider taking an Expert Opinion before your plan your Salary withdrawals.

2019-03-27T16:40:53+00:00May 29, 2015|Tax Planning|0 Comments