Four Tips for Small Businesses to Audit-Proof Business Expenses

If you’re a business owner and you’re drowning in an ocean of expense receipts, we’re here to throw you a life preserver.

One of the biggest issues disputed by the IRS — and the IRS wins in all but two percent of the cases — were trade or business expenses. In many cases, it was just a matter of poor record keeping by the taxpayers. If you’re going to claim business expenses, first you have to know what you can claim. Then you have to keep track of what you’re claiming and keep excellent records and support for the expense. You have to break out what is a business expense and what is a personal one so that you’re not claiming personal expenses. Following these tips can help keep your business expenses legitimate and avoid owing more money to the IRS.

• Only claim business expenses – This should be a no-brainer, but surprisingly many people try to claim personal expenses. If you use your personal vehicle and drive 70 percent for personal errands and only 30 percent for business, only deduct the miles you drive for business. If you took out a loan to start your small business but used half of it to remodel your kitchen, you should only deduct the half you actually put toward your business. You will deduct the expenses you used the loan proceeds for and only the interest for the portion of the loan used for business. Take a look at the IRS rules for deducting business expenses.
• Keep good records – A shoebox full of receipts is a system, but it’s probably not the most organized way to make sure you’re claiming all the expenses you should. You need to be able to provide documentation in case your return is questioned. Here’s what you will need to back up your deductions to the IRS. Find a system to track your business expenses that works for you, whether it’s paper or electronic, and stick with it.
• Don’t confuse hobby expenses for business expenses – If you have a home-based business and you only sell to friends and family (without making profit, year after year), the IRS probably views your business as a hobby. You can’t deduct costs associated with your hobby. In order to claim expenses, you have to run your business as a business and make your business profitable or show the IRS you are trying to make it profitable. The rule is you need to show a profit three out of five years. You don’t actually have to make a profit, but you do need to show IRS that you are trying to make a profit.
• Learn to properly calculate your home office expense – The good news is, this calculation was simplified in 2014. If you have a home office, you multiply the number of square feet of your office by $5 per square foot (with a maximum of 300 square feet). You can still do your calculation the old way, if it’s more beneficial to you, and it probably will be, but know that the home office expense is one of the more contentious items with the IRS. Make sure you’re calculating your deduction correctly and only writing off space that is used exclusively for your business.

If you need help, contact Myerson & Myerson, CPA’s at 703-753-1040, or email info1@mandmcpas.com.

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