Having no commute or annoying co-workers is just some of the many perks that self-employed people enjoy, but with those perks come a greater need for financial responsibility when it comes to bookkeeping. The IRS takes a close look at people who work from home and use their home and vehicles for business purposes on their tax returns, so read on to learn more about red flags that could cause you to come under the scrutiny of an IRS auditor.
Cash Flow
Electronic records of cash flow, such as credit card charges and payments, can usually be easily documented and proven in the event of an audit. Businesses that rely more on cash transactions, however, such as home day cares and crafts-people who sell their wares at markets, can run into trouble if they aren't careful with their record-keeping. Enter those transactions in a ledger and give out paper (with carbons) receipts for all cash transactions.
Vehicle Use
Few self-employed people have a vehicle dedicated to business use only, so good tracking methods to separate business and personal use is mandatory to prevent the IRS from disallowing your deductions. A simple and quick method of documenting mileage is to snap a shot of your odometer setting before and after a trip with your phone. For frequent destinations, just update a spreadsheet with the distance traveled. You can also find mileage-tracking apps for your phone that makes keeping up with transportation expenses a snap.
Travel, Meals and Entertainment
Ensure that you keep copious notes about your travel, meal, and entertainment expenses; not just the receipts but the purpose of the expense should be noted. The IRS requires that the expense be business-related, so be sure to note that a lunch expense was with your website creator to discuss changes to your website, for example. Be especially careful of mixing personal and business travel. You should not expect to be able to deduct a vacation just because you did some stock purchasing at the market while you and your family were in Atlanta.
Lifestyle
While an IRS auditor cannot target you simply because you appear to be richer than your profit indicates on your Schedule C, the appearance of wealth may cause greater scrutiny. Auditors are trained to not only look carefully at your financial records, but to observe disparities in stated income lifestyle. For example, it may be difficult for an auditor to accept a stated income of $25,000 for a person living in a waterfront mansion without further and closer investigation of your records.
Consult with a tax or business attorney such as http://l-wlaw.com for more information about avoiding and complying with an IRS audit.
Share16 December 2015
Starting a home business is a great idea, but never think that it should not be incorporated. As I learned the hard way, working with an attorney to set up the business properly offers a lot of protections. I figured no one would want to bother with me and my little operation. As things began to take off, a copycat business sporting the same name and a slightly altered logo popped up on the scene. The copycat was able to nab some of my hard-earned business and left me out in the cold. It took help from a business attorney to protect my brand and get things back on track. If you think it's okay to wait until later to legally structure your operation, think again. Let me tell you more about what I should have done early on and why. Listen closely and I'll save you some grief.