While my goal is to write blog posts and e-mails about interesting tax planning ideas, I occasionally run across business owners with simpler requests. Sure, they're very interested to hear how we help save our clients money from a tax planning standpoint, but perhaps more importantly, they're most interested in how to "stay out of trouble" with the IRS. I am often told by business owners that they feel as though they're too conservative, not deducting certain expenses because they feel they'll be audited if they do.
Look, the last thing any business owner wants to hear is an IRS agent saying, "Papers, please." With that in mind, let's talk about some basic "to-dos" to keep you and your business on the right side of the law:
1. Account for and pay your employment taxes.
Employment taxes are considered "trust fund" taxes because the money withheld from employees' wages is held in trust until it's paid to the US Treasury. Employment taxes cannot be discharged in bankruptcy, and if the IRS determines you're the responsible person, they can and will come after your personal assets to pay the debt. On top of the taxes due, the IRS can levy a Trust Fund Recovery Penalty, which is 100% of the unpaid income taxes withheld plus the employee's portion of withheld FICA (social security and medicare) taxes. This is a very costly mistake to make.
2. Keep your receipts.
Having owned a landscaping business before college, I understand the difficulty of keeping track of receipts. At the end of the day, the last task you want to focus on is categorizing those twelve small pieces of paper you were handed during the day. Unfortunately, doing just that is a necessity unless you are comfortable with the IRS disallowing deductions and forcing you to pay more tax.
Fortunately, keeping track of your receipts on-the-go is easier than it used to be. I have clients who still use the trusty old "envelope in the center console" method, which works for some. Technology works better for others though, myself included. For mileage, you can download applications on your phone like MileIQ, TripLog, and Hurdlr. For receipt tracking on the go, you can download applications like Expensify, Concur, and Shoeboxed. If you still use the envelope method, be sure to write who you met, what you discussed, and why you met them on your meal, meeting, and travel receipts to establish the expense's legitimacy.
For in-office recordkeeping, all business owners should consider switching to electronic records. Doing so ensures you're always able to quickly produce accurate records (read: not paying somebody to dig through boxes of old paperwork) - especially years in the future. Though the envelope method works for some, it may not work so well a few years in the future when the thermal ink on those receipts and invoices has long since worn away. An added bonus of paperless workflows is increased efficiency in the day-to-day accounting operations of your company.
Document management systems exist in a variety of different flavors for each business size. For Quickbooks users, Intuit offers a document management system, as does SmartVault. For larger businesses, most accounting system providers offer document management systems that will integrate seamlessly with your accounting system.
3. If it sounds too good to be true, it probably is.
As a business owner, it is common to reimburse yourself for business-related expenses you incur personally. There's no problem with doing that, as long as you have adequate records. That being said, don't "invent" expenses to reimburse, unless you want a headache down the road. For a business expense to be legitimate, you must be able to prove that it was incurred in the ordinary course of a trade or business, and that it was paid.
Contrary to the conjecture of some on the internet, nothing you do as a business owner will eliminate the possibility of an audit, short of closing down your business and ceasing to earn money. If you incur a deductible business expense, deduct it! Audits shouldn't be scary - as long as you keep adequate records along the way and comply with the law, you have nothing to worry about.
Chris Sieber is an associate at Pitcher, Enders, and Drohan. His clients include medical practices, private equity and real estate investors, manufacturing companies, and high-net-worth individuals. He can be reached at firstname.lastname@example.org or 513-554-4600.