How basic accounting will keep you out of hot water with the IRS
I often equate tax accounting to brain surgery: it requires special talent and education. Therefore, I clearly convey to my clients that I am neither a tax expert nor tax consultant. I also gladly point our clients in the direction of our preferred tax accounting firms for return preparation and advise. That said, there are a few company expense areas that all accountants do focus on to help keep clients out of trouble with IRS. Tax deductible expenses need to be reasonable and justifiable for companies to claim on their returns. Some business expenses we generally recommend our clients to seek tax guidance on include:
Home office – In order to claim a deduction for that part of a home used for business, taxpayers must use that part of the home:
Exclusively and regularly as their principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of their business, or in connection with their trade or business where there is a separate structure not attached to the home; or
On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility. (source: IRS.gov)
Family members on payroll – while it is permissible to employ family members; it is important to maintain sufficient ‘proof’ that the family member is truly working for the business. Documentation to support an employed family member can include: job description, offer letter or letter stating terms of the position, time sheets, etc.
Entertainment and meals – from an accounting standpoint, a business owner may reflect all spend related to entertaining customers or vendors as well as meals. We always request that the business owner(s) write on the receipt information that will substantiate the expense as business related. Information includes: name of person(s) invited, company they work for and nature of business meeting. Excessive deductions for entertainment and meals can certainly set off a red flag. It is prudent of any business owner to carefully manage this spend area so that it is not disproportionate to the overall expenses to run the business.
Bottom line, the best way to stay out of hot water with IRS is : be honest, save your receipts and seek professional tax advise if you are uncertain.
We hope you enjoyed our bookkeeping tips in this article!
LUXA Enterprises offers outsourced accounting services for small businesses in the Tulsa and surrounding areas. If you’re considering a short or long-term approach to outsource accounting, give us a call for more information at 918-928-7288.