Research Summary
Its safe to say that small business owners want to avoid a tax audit at all cost. There are ways to draw attention to your business, and there are also ways to avoid trouble with the IRS. When dealing with the IRS, it is important to use the correct accounting method, have accurate business mileage information, report exact business expenses, and provide proof of charitable donations.
Accounting methods for small businesses are not treated the same way as large businesses. Large business use the cash method of accounting, but it is better for small business use the hybrid method. When using the hybrid method, Sales and COGS are recorded by the accrual method and operating expenses are reported by the cash method. For this reason, inventories will be understated at any given time, because they are not actually paid for when they are received. If the IRS notices a problem with how the business is accounting for inventory, it will open their eyes for further exploration.
Another important tax factor is the way business report automobile mileage deductions. There are two different ways to deduct mileage. A business can use the standard deduction method or the actual-cost method. Either way mileage is recorded, the important thing is having exact records to back what is stated on the tax return form.
It is common for the everyday businessman to exaggerate business expenses. People have a tendency to overstate expenses, or report personal expenses as business expenses. If a red flag is thrown by the IRS, it is vital to be able to provide the needed receipts, as well as remember who you were ...