Just because you're a small business owner, doesn't mean the IRS doesn't have a close eye on you. In fact, Jessie Seaman, a licensed tax professional with the Tax Defense Network, said small businesses are now the target of IRS audits more than ever before.
"The IRS has switched its focus from large corporations to smaller business entities like sole proprietors, LLCs, partnerships and S-corps," Seaman said. Even the Small Business Administration suggests that small businesses are unfairly targeted by the IRS .
When deciding which tax returns need to be analyzed with a fine-tooth comb, Seaman said the IRS looks for certain red flags. Knowing that, she said there are a few things small business owners can watch out for when completing their tax return this year to minimize the risk of being audited. [10 Crazy Tax Deductions Allowed by IRS]
Among the most highly fudged tax deductions that the IRS is on the lookout for are:
- Home office deduction: The space must be used exclusively for business; the key here is exclusive. If the space is also used by the family for school projects, online shopping, a guest room, etc., then the deduction is not available.
- Meals, travel and entertainment: These are subject to strict limitations and require a receipt if more than $75. Meal, travel and entertainment expenses must match up with the nature of the business.
- Claiming 100 percent of vehicle use: Doing this and then deducting all related expenses sets off bells, especially if the taxpayer files on schedule and does not have a second car for personal use.
- Hobby versus business: If your business loses money every year, the IRS will view the activity as a hobby; no losses may be taken for hobbies. A business must net positive income at least three out of the last five years to be considered a business that may take a loss against other income.
- Losses on rental property: If the taxpayer is not a real estate professional, meaning that more than 50 percent of the taxpayer's work in the last year, or 750 hours, were spent in this field, no loss may be taken on rental property. If you are not a real estate professional, then be wary of claiming you are simply because you rent a property or two.