IRS statistic: 61% of sole proprietors underreport net business income.
Revenue Ruling 56-407: You must report all of your expenses.
Per the National Association of Enrolled Agents, the following are key audit categories: gross receipts, costs of goods sold, auto expenses, supplies, meals & entertainment, rent, telephone and depreciation.
Business income, receipts or sales.
If there is any connection between income received and a business, the income is business income. A connection exists if it is clear that payment would not have been made if the business did not exist or operate.
Car & truck expenses.
You can deduct the actual costs of running a car or truck OR you can take the standard mileage rate.
If you deducted actual costs the first year the vehicle was placed into service, then you must stick with the actual method.
For 2013, the standard mileage rates are:
- 56.5 cents per mile
Some types of deductions require greater substantiation.
If you use an asset for both personal and business purposes (i.e. a car or home),
- you must support the business use with items such as use or mileage logs or keep rooms clear of personal items (beds, tvs, toys).
Expense vs. capitalization.
When should you expense a purchase as supplies or capitalize it?
The IRS has no published $ thresholds for when a purchase is to be capitalized, except that purchases of tangible property should be capitalized when they have a useful life greater than one year.
You set the guidelines for your business.
For capitalized assets, you should record a description, date purchased, and categorize by type of property (i.e. furniture, software, leasehold improvements).
An asset is generally expensed or “depreciated” proportionally over its useful life.
However, IRS Section 179 allows that you may expense part or much of the cost of that property in the year purchased.
Depreciation is a useful, year-end tax strategy.
Deducting travel, entertainment and gifts.
Record the four p’s and a d on your support:
person, purpose, place, price and date
Other business expenses.
To be deductible, a business expense must be both ordinary and necessary (for your field of business or profession).
The IRS takes a hard look at necessary.