As a self-employed business owner, you can deduct advertising costs, office supplies and entertainment expenses on your tax return. These and other deductions can trigger an IRS audit, though, and here’s why.
Disproportionate Deductions
The IRS calculates normal deductions based on your income. High deductions with low income indicate possibly inaccurate record keepings, which could trigger an audit. While you may take higher-than-normal deductions during your first year in business or during lean years, always keep detailed documents that prove your deductions are indeed accurate and legitimate.
Home Office Deductions
The IRS simplified the home office deduction, and you should take advantage of it if possible. But don’t try to deduct home office expenses if you only make a few phone calls from home each year or sit on the living room sofa and watch TV while you work.
Excessive Entertainment Deductions
You may be able to take an entertainment deduction if you treat potential clients to a steak dinner. However, you have to prove that the expense was directly related to or associated with your business. Keep your receipts and document who you took out, what you talked about and how it related to business—such details can help you prove the legitimacy of your entertainment deductions.
Incorrect Business Vehicle Deductions
When you only own one vehicle and claim you use it 100 percent of the time for business, the IRS will question your calculations. You could also trigger an audit if you deduct both the actual accrued vehicle expenses and the IRS standard mileage rate. Maintain detailed mileage and usage logs to file accurate business vehicle deductions.
On your annual tax return, double-check the accuracy and legitimacy of your deductions as you reduce these common audit triggers. You may also contact us at 720-398-6088 with questions or concerns about your self-employment deductions. If you’re in debt to the IRS, or if you received an audit request from the IRS, call us. We can help you strategize, minimize the challenges and restore your sense of control.