5 Pitfalls of a Small Business Audit You Can Easily Avoid

small business audit

Many people feel the same way about paying taxes as they do about dentist or public speaking. This aversion only intensifies if you’re are a small business owner. You have so much on your plate already, anything added can send you into a whirlwind of stress. If you are one of the unlucky few that get chosen for an audit, don’t panic yet. Here are five pitfalls that you can easily avoid.

Pitfall 1: Improperly Deducting Start-up Costs

Are you a brand-new business? If you are, it can be tempting to write off all those pesky start-up costs. You’ve spent so much this year trying to get your business running, the least you can do is write it all off, right? Wrong. Start-up costs can only be deducted after you have made a sale.  This may sound like one more frustration, but there is good news. Your start-up costs can be deducted over a period of 15 years. If you didn’t make your first sale this year, that’s okay, you have time.  If your start-up costs have been under $50,000, you can deduct $5,000 in start-up costs and an additional $5,000 in organization fees. Your costs MUST be under the $50,000 in order to deduct these numbers (not $55,000).

Pitfall 2: The Wrong Business Structure

How have you structured your business? Choosing the wrong structure can cost you more in taxes. If you have a C Corporation, you get taxed twice, once when you turn a profit and again when your shareholders get paid for that profit.  Looking into more tax-friendly structures, such as S Corporation can save you from paying twice.

Pitfall 3: Mixing Personal and Business

The old adage of mixing business with pleasure is not one that you should follow. It can be tempting to only use one credit card or checking account with your small business, but in reality, this can cause more of a tax headache later on.  By keeping things separate, you can easily keep track for your taxes. This also will keep the IRS from chasing you down for using your business account to pay for Netflix.

Pitfall 4: Not Utilizing Medical Reimbursement

Do you work with your spouse in your business? If so, you may be missing out on a huge tax benefit. If you set up your spouse as an employee, you can use MERP (Medical Expense Reimbursement Plan) on things like copays and other medical expenses not covered by insurance. With your spouse as an employee, not only is it their expense, but yours and your children’s.  To make your spouse an employee, be sure to have time sheets or other form of paper trail to show evidence of the business connection. It doesn’t have to be full time work, but it does have to be real.

Pitfall 5: Paying Late

Taxes aren’t going away, so why pay now, right? No. Paying late can lead to costly fees and other issues. The IRS will add about 1% a month to your late bill. If you can, pay early. If you can’t, talk to the IRS about a payment plan. There will be a fee, but it will be less than the monthly percentage.  If you feel lost in the jungle of taxes and are terrified about an audit, don’t muddle through alone. We can help you make sense of this and help you through this. We have the experience and knowledge to help you. Don’t let the word “audit” ruin your day, contact us at Nguyen and Associates CPA.

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