If you get involved with an audit the burden of proof lies on you. While you might not be able to avoid an audit, you can make it less painful by following a few simple rules.

You should always keep accurate records showing travel, entertainment, meals, seminars, medical, auto and other business deductions you might take. They should be containing specific information like the date, amount, reason for the expense, and the names of people who might have accompanied you.

If you don’t think it’ll happen to you then think again. You are in the highest risk category for an audit if you are self-employed, or involved with a pass through entity such as a partnership, S-corporation or an LLC; especially if you are a corporation with a reported income of over $250,000.

Taking the time to keep accurate records from the start can save you a tremendous amount of time and hopefully money when and if you are involved in an audit.

 According to an article entitled, “Audit Proof Your Business-Maximize Your Deductions With Confidence,” posted at www.mygeorgiaaccountant.com, small business owners should keep a few things in mind when you’re preparing yourself for the IRS’ eagle eye.

“Self-employed business owners have one of the biggest targets on their backs from the IRS.  They are constantly under scrutiny for the deductions that are taken since there are many that attempt to take advantage of the system.  It is for this reason that it pays to take a few extra steps to minimize your chances of getting bitten if your return is selected for audit.”

The article continues on to say, “The main goal here is to keep adequate documentation so you can maximize your deductions with confidence.  Nobody is saying to break any laws, we just want to make sure that you get every deduction possible and the best way to do this is to make sure that you are ready for questioning before the tax return is filled out.  In the unlikely chance that you are selected for an audit, being prepared will make the process a quick and painless one.  The Internal Revenue Service is more concerned with the folks that cannot back up their deductions than the ones who can.”

Auto Expenses

• Mileage – keep a log if possible
• If no log, use your appointment calendar for proof of your meetings and therefore, your miles driven
• Can also use total fuel purchased during the year to calculate mileage
• Charge all fuel purchases to your business account

Advertising

• Keep invoices from advertisers as proof of your expenses
• Keep a copy of the ad placed or some samples of any promotional items purchased

Equipment/Assets

• Keep receipts, proof of purchase as your accountant will need these at year end when preparing your tax return
• Scan a copy of loan and lease agreements to your computer and email to yourself after deal is signed so you have a permanent electronic  copy

Meals

• Keep a good record of breakfast, lunch and dinner meetings
• Write who you met with and what business purposes you discussed on the back of your receipt

Subcontractors

• Don’t pay a dime until you have a W-9!
• No w-9/no 1099/-deduction can be disallowed or payments can be re-characterized as payroll and become subject to  back payroll taxes

Receipts not required  if less than $75

• Per IRS rules, you are not required to provide receipts as proof of any purchases that are less than $75

 Charge to business checking account

• When in doubt, charge any expenses that may be deductible to your business checking account-it is easier to reclassify any purchases as personal as opposed to going through your personal accounts and identifying any business expenses

Reconcile your books or pay someone to do them for you

• Unless you possess some formal accounting training, there may be some deductions and opportunities that are missed if you handle all of your own bookkeeping duties

If selected for audit, will need to usually supply:

• Bank Statements
• General Ledger
• Balance Sheet
• Income Statement
• Tax Returns
• Other Supporting Documents (Leases, Loans, Amortization Schedules, etc.)

Pay your taxes!!

• It sounds like a no-brainer, but one of the easiest ways to get on the IRS’s radar is to ignore your tax liabilities, once they discover that you are non-compliant, they have an open window to start digging further into your file

Neat stack vs. Box of Crap

• If you are selected for audit, showing up with a neat stack of papers that are already sorted and organized will make your audit process a less stressful one

If you own a vacation home, it is usually desirable to have it treated as rental property for tax purposes. It is considered rental property if you personally use the house for 14 days or less in a year, or, even if you use it for more than 14 days if your personal use is no more than 10% of the total days it is rented at fair market value.

Alternatively, the property would be considered residential property. The advantage of having the property treated as rental property is that you would be able to deduct the total business related expenses and depreciation and take up to $25,000 in losses per year subject to the passive loss rules. Under the passive loss rules, once your adjusted gross income exceeds $100,000 the maximum $25,000 loss deduction starts being phased out, and disappears entirely when adjusted gross income exceeds $150,000.  However, the passive losses can be carried forward to future years in which the loss limitation is not triggered. You should also be aware that to the extent you make personal use of the rental property, the portion of the mortgage interest attributable to your use of the property becomes personal interest that is not deductible for tax purposes.

For taxpayers who are unable to take deductions on the vacation home because of the passive loss limitation, it may be desirable, tax wise, to make additional use of the vacation home so that it is treated as residential property, since it will enable them to treat the mortgage interest as a tax deductible interest expense.

These are just a few thoughts about tax consequences of vacation home ownership and strategies for maximizing the benefit. Since the rules are quite complex, many vacation homeowners meet with us each year to help them with the tax planning.

After last week’s really inspiring Small Business Week celebration we received a lot of feedback from all of you that participated. I wanted to take away some of your questions from last week and make sure that we cover some of the topics that were brought to my attention. Thanks again for making this past week’s festivities so engaging; without you this idea would not have materialized into the successful event that we plan to make an annual celebration at Laughlin Associates.

Small Business Q & A 

Q: If I am the 100% owner of a company and I am about to take out a business loan, is it possible for me to be personally liable for paying back the loan if for some reason my company is unable to repay it?

A: This question has two answers depending on your situation. If you’re operating your business as a sole proprietorship or as a general partnership, the fact is, you’ll be personally liable for any loans or other transactions taken on by the business. If you’re business is a properly structured corporation or limited liability company, then the owners are considered to be separate from the business and should not be held personally liable for the loan, as long as you don’t sign a personal guarantee.

Q: I own a small home-based business. What are the reasons I should consider incorporating?

A: Most people incorporate to reduce their liability. Owning a corporation creates a legal separation between you and the company. This protects you from being personally responsible for the actions of your business. Only assets that belong to the corporation will be at risk for satisfying corporate debts or liabilities.

Corporations are taxed at the corporate rate, which in some cases, is much lower than the rate for sole proprietors.

An owner who also works at the business can become an employee, which makes it possible for them to obtain reimbursements for many expenses, including health and life insurance.

Overall, a corporation will provide valuable asset protection and tax benefits that will far outweigh the initial cost of incorporating.
 

Q: I have been told that my Corporation needs to comply with Corporate Formalities. Could you tell me what this means and what I need to do to maintain compliance?

A: Following corporate formalities really revolves around keeping and maintaining the proper corporate records. You should have a record book to keep documentation of all major business transactions conducted by the corporation. Items like corporate resolutions, state annual filings, financial statements, and stockholder information are all documents that need to be kept current and organized in your corporate record book.

Failure to follow corporate formalities could have a harsh outcome. Your corporation could lose its corporate status, meaning you could suffer the loss of limited liability. This could leave you and your shareholders personally responsible for the corporation’s debts. It is also possible to lose all corporate tax benefits.

For more information or to get clarification on any particular areas of concern please call us at 1-800-648-0966 to speak to a Senior Business Consultant today.

These are the classics that you don’t want to collect: classic blunders that can trip up a small business. These are mistakes that, while new to you, happen over and over again.

History doesn’t have to repeat itself, though. Here’s a complete list to help you learn from others’ blunders.

Mistake One: Trying to compete without a game plan.  Put your plan in writing.

Mistake Two: Starting a business in a field that you know little or nothing about and failing to bone up on the topic before you start your business.

Mistake Three: Failing to make up for your own weaknesses when hiring your management team.

Mistake Four: Going first class from the get-go.

Mistake Five: Proceeding with insufficient capital.  It’s hard to raise money, so owners of fledgling businesses will generally opt to forge ahead even though they know deep down in their hearts that their pockets aren’t deep enough. They’ll just assume that they’ll make up for the economic shortfall down the road. However, without adequate financing, your company will never make it to the next capital fueling stop.

Mistake Six: Placing love over logic.

Don’t fall in love with an idea.  Do your homework.

Mistake Seven: Placing logic over love.

While you need a cold, objective eye on your product, you also need to have passion if you expect to convince others to try your product.

Mistake Eight: Taking the shotgun marketing approach.  Trying to be all things to all consumers generally fails. A small business needs to have a laser-like focus on customers, their needs and how the company can fulfill those needs.

Mistake Nine: Refusing to admit you’re wrong.  It’s bad enough to misjudge a market or a product but owners of small companies tend to compound that error by failing to admit it and then failing to make changes that could save the business.

Mistake Ten: Overestimating your company and underestimating your competitors.

Mistake Eleven: Not keeping a tight rein on costs.  Early successes can lead a company to forget frugality and let costs spiral out of control. In fact, revenue may soon fail to keep up with the rapid pace of your expenses, leading your company into deep trouble.

Mistake Twelve: Letting early successes go to your head.  A new business will start reaping in orders and its owner will decide he can slack off on marketing. 

Make sure you don’t add your business to this collection of classics.

During these tough economic times it seems with the flip of a page or a click of our mouse that stories are consistantly available telling a story about an entrepreneur going out of business. On the other hand, the hopelessly optimistic print stories talking about how now is the time to thrive and take advantage of the lower-than-ever market prices.

I’m a realist–so let’s keep it real. In today’s world despite the real estate market being at an all-time low, some people simply don’t have the cash flow to scoop up those cheap properties. Most of us still have bills to pay, mouths to feed, and deadlines approaching on an all-t00-regular basis. If you’re worried about paying your mortgage, are you really going to start a business? Probably not. Some businesses just don’t make it any economy but when a successful venture goes out of business, the prior owners are often left thinking, “What do I do now?”

Going through the New York Times small business section, I came upon an article called “How Six Companies Failed To Survive 2010.” It goes through 6 different companies from all over the country that folded this past year and also covers the peak period of the business to the point the business ended up closing shop. The demise of each failed business is different. The reasons vary, but the outcome is the same: the money just wasn’ t there.

The sad fact that some businesses just don’t make it is one that entrepreneurs are very familar with. In truth, most entrepreneurs have tried more than business venture that hasn’t worked out. It’s the name of the game.

What still astounds me is the way these entrepreneurs pick themselves up and get back on the horse. It’s a true testiment to just how determined they are to make their ideas work and create a livelihood working for themselves. It seems a true entrepreneur just has to do things on their own terms. They aren’t cut out to work for someone else and they aren’t going to. However, in order to really make a business work there are a few things to consider when you’re running a successful company to prevent failure.

1. Don’t spend all that you make–save your money and put it aside for emergencies, back-up resources, and business expansion.

2. Build a business credit profile–don’t use only your personal funds. Build your business credit and make your debt an asset of the company rather than a liability.

3. Invest in free marketing–stop dumping all your funds into paid advertisements and large marketing firms. Write a blog, post SEO articles, build a Facebook profile and make connections on LinkedIn.

4. Stop hiring more people than you really need–get hands-on with your business if you’re not already, cut back on the amount of employees you have and keep those vital to the running of your company.

5. Maintain a solid business plan–always have a plan B, C, and D available in case of unexpected road blocks or unforeseen tragedies. Technology superceeds our innovations at times, so make sure your business can adapt to the ever-changing business market.

I would love to hear your thoughts on how businesses can avoid failure. What have you done to keep your business afloat? Have you tried and failed before? What did you learn from your experience?

Give us your feedback at sjohn@laughlinusa.com