Tax season is dread for many business owners. This is for good reason, too. Tax season is filled with a lot of extra work if you haven’t been working on them throughout the year. Part of being a business owner means that you will certainly have deductions that you will be able to claim to bring down your taxable income at tax season. However, there are rules that you must follow when claiming them. Propel Your Accounting is here to share some IRS deduction rules that all small business owners need to know about.
Follow These IRS Deduction Rules
We would like to clearly lay out the rules that the IRS requires small business owners to follow when they are claiming deductions.
– Documentation is Necessary: With absolutely no exceptions, documentation for every single expense is necessary when filing taxes. It doesn’t matter how legitimate the expense is, if you don’t have clear documentation that states the amount, the date, the business purpose and relationship to your business, that expense is going to be thrown out. If you aren’t sure what documentation you need, it is important that you ask your accountant to clarify.
– Ordinary & Necessary Expenses: When it comes to filing deductions, it is important that these expenses are both relevant to the industry and necessary to keep your business going. If this isn’t the case, the IRS will have issues with it.
– Mixed-Use Assets: Sometimes, there may be assets that are used for both personal use as well as business use. In these cases, they need to be appropriately split. If you are using a care for your business 60% of the time, you can only deduct 50% of the expenses rather than 100% of the cost.
– Note Special Limits: There are special limitations that have to be addressed when it comes to deductions as well. For instance, food is only 50% deductible. Knowing what deductions have special limits is something you can figure out with the help of your accountant.
Watch for These Common Audit Red Flags
There are certain red flags that will trigger an audit for your business. Here are some of the things that will be red flags for the IRS:
– Too many round numbers claimed
– High deductions when compared to your income
– Claiming 100% of assets that are clearly both business and personal assets and should be split
– Deductions not matching typical deductions for your industry
Bookkeeping, Accounting, Business Consulting & HR / Admin Services in the United States of America
If you are a small business that dreads tax season because of the workload it is, you can turn to Propel Your Accounting to take the task of accounting and tax preparation off your hands. We will take care of this so that you can focus on other aspects of your business. We are here to answer any and all of your questions regarding deductions as well. Call us today!
