How can I avoid a tax audit on my business?

Any small business owner should be concerned about tax audits because small businesses are audited three times more often than individuals. And, if you are audited, the taxman is most likely to focus on your auto, travel, and entertainment deductions.

Entertainment: While it used to be that you could deduct up to 80% of all entertainment expenses, the limit now is 50%. The good news is that almost any entertainment activity that relates to business can be deducted: A round of golf, important dinners, taking a client to a game or concert, or even a day on a boat.

The important thing is to keep good records, all receipts, and be able to prove that the expense was related to business. It's not a bad idea to write who you were with on the receipt before filing it.

There is one nice exception to the 50% rule: If you throw a party, picnic, or some other event for your staff and their families, those expenses are 100% deductible.

Travel: Travel expenses you incur for business are 100% deductible. However, if your family joins you for your business trip to Orlando, their expenses are not deductible. Similarly, if you stay longer than business requires, the extra time is not deductible, unless you stay for a night or two to get a discounted airfare. In that case, your extra hotel and meals would be deductible.

Automobile: There are two ways to calculate your vehicle deduction. The "standard mileage" method lets you deduct 36 cents a mile when you drive the car for business, plus business-related tolls and parking expenses.

The "actual expense" method lets you deduct your actual expenses for gasoline and repairs, plus depreciation. Then, you need to multiply your expenses by your percentage of business use. For example, if your total expenses are $10,000, and you use the car 40% for personal use and 60% for business, your deductible auto expenses would be $6,000.
It's not a bad idea to keep a log of when the car is driven for which purpose.

The upshot of all of this is that to avoid problems with Uncle Sam, be sure to keep good records. IRS studies show that it is poor record keeping - rather than over-deducting - that causes most small businesses to lose an audit.

Accordingly, you need to keep receipts, cancelled checks, credit card statements, and so forth, as they relate to, among other things:
- Rent.
- Advertising and marketing.
- Labor costs.
- Travel.
- Entertainment.
- Utilities, etc.

If you keep good records, your chances of success in an audit - of not getting hit with an extra assessment and fine - will be much greater.



Steven D. Strauss

Author of The Big Idea: How Business Innovators Get Great Ideas to Market