How to Keep Your Small Business Out of Hot Water


Is Your Small Business in Danger of an Audit?

In recent years, the total number of audits on small businesses has increased at the IRS despite a decrease in the overall number of audits.  Sadly, this change in focus by our IRS is based almost solely on their search for more revenue.  Because of the nature and number of small business deductions, the potential for error is greater.  If you qualify for a deduction don’t be afraid to take, but be prepared to prove you deserve it.  Below, is a list of some of the more common deductions that will set off a red flag at the IRS;

5 of the top reasons for an IRS audit 

Home office deduction 

There are two primary areas where filers make mistakes with this one.  First, is calculating the amount of square footage actually being used for the office accurately.  Second, the office space must be used “…exclusively and regularly for your course of business…”  The problem arises over subjectivity; what do they mean by ‘exclusive’?…or ‘regularly’? Should I include that part of the home or not?  These questions can be difficult, but not impossible to prove and justify.

Mileage deduction 

The main reason this deduction raises a red flag is improper use of what constitutes business use of a vehicle and insufficient documentation.  In order to claim miles you must be able to prove the miles driven, the business reason and the date.  Sadly, most people just don’t keep sufficient records of this information; keeping a journal in your car will help, but you have to use it.

Excessive expenses; especially high meal and travel expenses

Expenses must be ‘ordinary and necessary’ for the course of business. Yet another area of the tax code where the subjective nature of the language creates real problems for the business owner.  If you do not have receipts to back up the expenses and proof of the relevant business nature, these expenses can be disallowed.

Losses on your schedule C 

If a business continues, year after year, to have a loss on their schedule C the IRS could deem the business as a hobby.  The IRS recognizes a business as having a ‘reasonable expectation of earning a profit’.  This is another one of those troublesome subjective phrases that gives the IRS too much room to work and the business owner no room for error.  It comes down to this; If you haven’t earned a profit in several years you could lose your business classification.


Typos on social security numbers, tax ID numbers and names, as well as math mistakes can be a signal to the IRS that the return was not prepared carefully and thus could include other mistakes.

It is important to keep good records throughout the year to be able to substantiate any item on your tax return. Lack of good record keeping is a top reason for most of the above deductions being disallowed.  When you have doubts, seek out professional help with your taxes.

The article is for informational purposes only.  Details are subject to change without notice.

Copyright 2014 Christi Rains, Alpha Omega Consulting & Bookkeeping, LLC

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