Tax time for businesses often means a visit from the IRS, especially if they didn’t know they were making tax mistakes. Sometimes, triggering an audit is unforeseeable, but the more you know about the mistakes that catch the attention of the government, the less likely it is that your business will have to deal with one.
Here are some common red flags that could bring on an audit:
You Have More Contractors than Employees
Anyone who owns a business with more than a few employees knows how big a pain payroll can be. Wouldn’t it be nice if you could classify your workers in a way that would relieve you of that responsibility? You can, but you might want to think twice before doing it if you don’t want to be audited for your tax mistakes.
Classifying your workers as contractors rather than employees does get rid of the need for payroll. However, you will be putting a target on your back for the IRS. If you have more contractors than employees, be prepared for a letter in the mail.
Inordinately High Executive Pay
If your business entity is a C corporation, you need to make sure that executive pay is reasonable. The reason for this is that high salaries take from the tax obligation of your company.
Excessive Home Office Deductions
The home office deduction is a great way to reclaim some of your business expenses. However, it is also a red flag if your home office deduction is too large in comparison with your business income. If you plan to claim both a home office and business space, more than 50% of your home, or a lot of expenses for utilities, you need to be especially careful.
Using the Wrong Accounting Method
When it comes to tax mistakes, one of the most common for businesses is a simple one. There are two types of accounting that businesses use: accrual accounting and cash accounting. Most companies will be in the clear if they use the accrual method. However, and this is important, not all businesses should use the cash method of accounting. It’s important to learn the difference between the two and to ensure that you are using the one that you should be.
Want to Avoid These Tax Mistakes?
Are you worried that you’ve made more than a few tax mistakes that will put you at risk for an audit? Call Calas Bookkeeping, Accounting, and Financial Services to see how we can help.