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3 ways your business may become a tax headache

On Behalf of | Jun 20, 2019 | Tax Debt

Starting a business is often an effective way to realize the American dream. After all, not only does a small business give you both flexibility and income, but a successful one may also provide you with something to leave your children. You do not want your business to turn into a tax headache, though.

In 2017, the Internal Revenue Service audited about a million tax returns. Even though that number is a fraction of the total returns received, it is not exactly small. While you probably cannot eliminate your chances of an audit, you can be smart with your tax filing. Here are three ways your business venture may trigger an IRS audit:

1. You have a home office 

The tax code allows you to deduct home office expenses. Not every part of your home qualifies as an office, though. To be eligible for the deduction, you must use your home office exclusively or mostly for work. Because taxpayers routinely stretch home office expenses, claiming a deduction may cause you to receive an audit notice.

2. You have a lot of business losses 

To promote economic growth, the IRS allows entrepreneurs to deduct many business losses. You must be careful with the losses you claim on your tax return, though. If you have too many, an examiner may wonder how your business remains viable. Because businesses with too many losses often fold, an IRS agent may ask you to prove your business losses are legitimate.

3. You have too many business expenses 

Looking for tax deductions can be fun. If you become too liberal with your return, though, you may find yourself on the receiving end of an IRS audit. Before you claim a deduction, you must be sure the expense is both common to your business and necessary for completing your work.

As a business owner, you should take advantage of tax deductions whenever possible. Still, you probably do not want the stress that comes with an IRS audit. By understanding the common reasons business owners face tax audits, you can better plan for avoiding one altogether.