Small business owners may receive some unwanted mail in 2014–an IRS audit notice. While it’s likely a randomly generated inquiry into your business, the mere thought of accounting for every last step on your tax trail can be daunting. We work with our clients who receive audit notices to make sure the process goes as quickly and smoothly as possible. Here are a few steps we recommend small business owners take first to prepare for the auditors’ arrival:
1. Check and re-check your 1099s. The opportunity for 1099 mistakes are plenty. Laws have changed recently regarding which independent or non-incorporated business you must issue 1099s to and under what circumstances. These additional requirements expose business owners to more risk if they fail to comply. Or you may have misclassified a worker as independent contractors when they are actually an employee. Workers classified as employees require the business to pay more taxes, so the IRS watches this closely.
2. If you loaned your business money, charge interest. Many small business owners float their companies cash occasionally, especially in lean or early times. The IRS insists you charge your business interest on that loan and will be sure to check that you did. It doesn’t have to be shark-like terms, so just follow the IRS-minimum rate guidelines you’ll be clear.
3. Watch your “entertainment” expenses. Most business meals out are deductible up to 50%. But frequent meals or extravagant events will catch the IRS auditor’s attention, so keep entertainment expenses realistic. Keep receipts, and no, discussing a new client with your wife during your anniversary dinner does not count as a “business lunch.”
4. Map out mileage. Car mileage in excess can be a red flag to the IRS, so be sure you are accurate with miles traveled for work and pleasure and keep them clearly delineated. Document all miles traveled and be prepared to defend your mile accrual method.
5. Consider your gift giving. Gifts to clients and business associates are deductible up to a $25 limit–which is hard for many small businesses to stick to. Keep good track of who gets which gift and don’t’ make the mistake of sending a gift to the entire office but addressing it to an individual.