What the IRS Expects from Small Businesses

What the IRS expects from Small Businesses

The IRS expects that a business will be profitable in three out of five years. It is important to demonstrate that you are truly running a business. If your business deductions are “disallowed”, the IRS will classify the income and expenses as a hobby activity. Proving to the IRS that you are running a business means you should consider the following rules.

  • Separate business and personal expenses. Have separate bank accounts and credit cards.
  • Keep receipts, records, and logs for all activities.
  • For automobile use, keep a log that shows mileage, and purpose of the trip. If you use an automobile frequently for business, consider using the MileIQ app for the iPhone to automatically record business mileage. For less frequent automobile use, print or save a Google Map of each trip to record mileage.  In either case, record the mileage on the first and last day of the year for each vehicle you use in business.
  • For meals, keep a record of your prospect or client, the name of the restaurant or venue, the cost, and business purpose of the meeting.
  • Keep receipts from hotels, conferences, and airline travel. (If you take family members, separate out their expenses from your business expenses.)
  • Keep receipts and a record for all other expenses related to your business (see next section.)
  • For service businesses, keep a list of clients that includes name, address, and the amount, description, and date of the services purchased
  • For businesses selling products, keep inventory records that includes the cost of purchases, additional manufacturing costs, and the sales markup. If you are selling products, you should consult with your tax advisor or accountant on how to maintain inventory records for your business.
  • For businesses with employees, you must collect payroll taxes, i.e. withhold federal and state income social security, and Medicare taxes. Payroll-related tax returns must be filed quarterly.
  • For businesses that pay contractors, consultants, or other services providers, you need to file 1099-MISC statements for annual payments that exceed $600.
  • Whenever buying new equipment, technology, software or even furniture for your business, save receipts and keep detailed records that include purchase price and date placed into service. Generally, these purchases must be depreciated over a specific number of years. However, there is a Section 179 deduction, which allows you to deduct the entire purchase price of new and used assets up to $500,000. Your business must be profitable to receive this benefit.
  • Follow all local and state rules for maintaining a business. The IRS considers up-to-date business licenses, professional certifications, and the payment of local and state taxes as a sign that you have a legitimate business, even if your business has a loss.
  • SUGGESTION: Create a one- or two-page business plan that describes your business, including the nature of the business, potential clients, and the factors required for success.

What Business business expenses are deductible? Click Here