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7 small biz tax-filing tips

By David Bakke · Bankrate.com
Wednesday, September 28, 2011
Posted: 11 am ET

While most small business owners are honest citizens doing their best to pay their fair share in taxes, there are a few who try to dupe the system. As a result, the IRS has created a formula called the Discriminate Function that looks for certain tax audit red flags in returns to catch those individuals. Should your return raise too many of these flags, you may find yourself the subject of an audit. Though there is no way of knowing everything the IRS finds suspect, but there are a few things you can do to reduce your risk of being audited.

1. Do your own tax return
It's a good idea for your business to do your own tax return, not only to save money but also to keep a close eye on your financial situation. Tax preparation software can help you file your return quickly and efficiently, guiding you every step of the way.

2. Check your work and start early
Make sure that the math is correct on your tax return. If you happen to make a mathematical error, the majority of the time the IRS will alert you of it and allow you the chance to correct it. However, repeated computation errors are a signal to the IRS that you are either trying to cheat the system or are too careless to file an accurate return -- which can trigger an audit.

To avoid these issues, stay organized throughout the year and start your taxes early. This will give you time to review your tax filing and ensure that your numbers are accurate.

3. If you itemize, itemize correctly
Any taxpayer that includes a Schedule A with their 1040 return has a greater likelihood of being audited. Therefore, it's a good idea to take the standard deduction and avoid itemizing if you can.

For example, let's say you go through your return and find that by itemizing, your total deductions are $10,600, while your standard deduction is $10,500. It's likely in your best interest to forget about that last $100 and just take the standard deduction rather than potentially risk the likelihood of an audit.

4. Filing a loss for a small business
Because this is a prime area for fraud, the IRS keeps a particularly close eye on these claims. If you have just started a small business and do lose money, by all means, report it as such.

It is key to know if your claim fits the guidelines. First, make sure that it is in fact a small business (the IRS could consider it a hobby if you don't turn a profit by the third year in business), and that you have  unambiguous documentation for such small business losses.

For fledgling entrepreneurs, life is difficult enough; don't throw a monkey wrench into the works by setting yourself up for an audit.

5. Falsely claiming the home office deduction
In order to claim the home office deduction, you have to have a separate "office" in your home that is used exclusively for the maintenance of your home-based business. If your business computer is also your personal computer, you cannot legitimately claim this deduction.

If you can qualify for this deduction, it can have a large effect on your return. You can write off depreciation costs of your computer and other office equipment, Internet fees, cell phone fees and more. Just don't try to sneak it in; the IRS is watching.

6. Charitable contributions
Claim all tax deductions for charitable contributions and donations on your return -- just make sure you do so in the proper fashion. Use the following guidelines to keep everything on the up and up:

  • Make sure it is a qualified charity organization.
  • These contributions are only tax-deductible if you itemize.
  • Keep excellent records. This includes canceled checks for cash donations, letters of acknowledgment from the charity and appraisals for donated property.

In addition, keep in mind that if any individual noncash contribution exceeds $500, you'll need to fill out Form 8283.

7. Take your time
While there are different schools of thought about whether filing later in the tax season can be beneficial, one thing is certain: The more thorough you are, the less likely it is that you will miss something.

You should take as much time as you need to file an accurate return. If you need an extension, go ahead and file for one. Questions are far more likely to be raised if you file an inaccurate, rushed return than if you take the time to make sure everything is correct.

Have you had to deal with a tax audit in the past? What caused it?

David Bakke writes for MoneyCrashers.com, a personal finance blog focused on money management topics like budgeting, taxes and getting out of debt.

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1 Comment
Henrika Conner
September 28, 2011 at 12:32 pm

To recommend that a small business owner prepare her or his own tax return is at best a naive statement. It reminds me of the commercial where a man is encouraged to operate on himself at his kitchen table: the attempt and outcome are both scary.