In case you are clueless, with 25 days till tax day, accountants would like you to know that writing off facelifts, bail bonds, and pets as business expenses are surefire ways to invite an IRS audit. Those were among the more entertaining deductions reported by more than 400 small business accountants in a recent survey commissioned by the online accounting software provider Xero and conducted by Zogby Analytics.
But even less outrageous missteps—such as taking a large number of deductions, deducting as business expenses those that could appear to be personal, mistaking or misstating the status of your workers, or writing off a home office—could trigger an audit, accountants say.
How to avoid that? Accountants, no surprise, suggest seeing your accountant. Others say don't shortchange yourself. If a deduction is legitimate, take it, but be ready to back it up with documentation in case you are flagged for an audit.
Though they warn against mixing your business and personal expenses, accountants say the most overlooked small business deductions are out-of-pocket expenses, auto expenses, office improvements, and depreciation. On the Small Business Administration’s blog this week, attorney Barbara Weltman explains what a business owner needs to know about writing off out-of-pocket expenses that were not covered by the business: “The legal entity for your business dictates how you deduct the expenses not covered by your company,” she points out. Independent contractors, sole proprietors, and single member LLCs take a different approach—and use a different tax form—than shareholders of corporations, C-corps, and S-corps or than partnerships and multi-member LLCs.
Accountants can do more than help you avoid an audit, of course. Other outcomes of the Xero poll point to ways small businesses could save money at tax time.
For instance, do you hand your bills and receipts over to your accountant in a shoebox and let her sort them out? More than 60 percent of accountants say that their clients could save more than 5 billable hours—some even more than 20 billable hours—by keeping their own files up-to-date and reconciled daily.
In fact, “not keeping their financial records up-to-date” is one of the greatest mistakes that most accountants say small business owners make. Not budgeting and forecasting their financials is another top screw-up.
The number-one mistake small businesses make regarding taxes, according to accountants? Only talking to their accountant during tax time. “With the implementation of the Affordable Care Act and possibly an increase in the minimum wage among other issues, accountants are seeing the need for more consultation and communication throughout the year with their small business clients,” according to Xero’s Jamie Sutherland.
For more tax time advice check out these earlier reports from Yahoo! Small Business: