August 1, 2022
Tax Advantages of Owning a Small Business
MONEY
If you’re self-employed, there are many deductions available to you that the average person without a business can’t take advantage of. In fact, if you don’t have a small business, you might consider the many financial benefits of starting one. Simply making an honest effort to earn income from what is normally just your hobby can open up a lot of tax advantages, even if you keep a regular full-time job.
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There is no foolproof way to avoid being audited. The IRS makes most of its selections either based on the fact that the filer is part of a targeted group or because a computer program picked out the tax return.
However, even though many of the returns are chosen by random means, there are certain red flags that make a return more likely to be audited.
If you don’t want the IRS knocking on your door, avoid these red flags:
- Arithmetic errors: If you make an addition or subtraction error, you’re going to hear about it. This usually doesn’t result in a full-blown audit, but check your math before filing your return.
- If you do get a letter from the IRS about your perceived mistake, double check. Sometimes a number was read or keyed incorrectly.
- Mismatched numbers: For example, if the numbers on your 1099 form don’t match the entries on your return, the IRS will notify you. Again, double check and be sure that the error was yours, not theirs. Sometimes an IRS employee will enter a social security number as income!
- You get most of your income in cash. The IRS will be looking for unreported income, and any cash deposits made to your accounts will be scrutinized. If those deposits aren’t being reported as income, you’d better be able to explain it.
- Self-employed and small business owners are particularly targeted.
- Keep excellent records, especially about your deposits.
You talk too much. If you’re ever foolish enough to try to pull a fast one on the IRS, keep your mouth closed. You’d be surprised how many neighbors, friends, and even family members report what they’ve heard.
- This can even include things like charitable donations. If you claim you’re giving 50% of your income to charity, it looks odd to the IRS. They’re going to take a closer look at everything on your return. That doesn’t mean you can’t give 50% of your income away – it simply means that everything else will be scrutinized.
- Your tax preparer is questionable. Not all tax preparers are created equal. Some simply aren’t very good. Others are intentionally breaking the law. They may promise a large refund and then claim false deductions on your return. While you’re not entirely at fault, the IRS will be coming after you, too.
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- Remember that the IRS gives 15-30% of the additional tax collected to the whistle blower!
- You’re out of the ordinary. When your deductions are considerably greater than others at your income level, the computer will flag you.
- There’s even a form, Form 211, to report those not paying their taxes properly. A large number of serious crimes are solved because the perpetrator told someone what they did.
- Keep in mind that the IRS doesn’t have unlimited time and resources. They target the returns likely to result in the biggest collections. Don’t pay more tax than you have to, but don’t go too far and cross the line in your deductions.
Being audited is never a positive experience. On the other hand, if you act in good faith, it’s unlikely that anything bad will happen beyond an increase in your tax bill.
The tax code is complicated – everyone knows that, even the IRS. Be honest and you have little to fear. However, keep these red flags in mind before filing your tax return!
Post Tags:
Small Business, taxes
ABOUT BRYANDIE
Bryandie Cox-Walker, founder of Business Building Profit Lab, a virtual business school, is a millennial entrepreneur and successful business owner with over fifteen years of experience in financial services. She holds two master’s degrees in business, a bachelor’s in Sales and Marketing, and several certificates. She has a passion for learning and helping people get their businesses up and running from the ground. Bryandie has had success in building three separate successful businesses within the past decade. Her extensive knowledge and training are in Income Tax preparation, Credit repair, Life insurance, and business consulting, giving her an exclusive insight into the world of credit and finance.