IRS Hot Button Issues
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 2008, the standard mileage rates are: - 50.5 cents per mile (Jan - June) - 58.5 cents per mile (July - Dec) |
Some types of deductions require greater substantiation. | If you use an asset for both personal and business purposes (i.e. a car or cell phone), then in general, you must support the business use portion with corroborative evidence or a use/mileage log. |
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. It is up to you to set 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). |
Depreciation basics. | An asset is generally expensed or “depreciated” proportionally over its useful life. However, IRS Section 179 allows that you may expense part or all of the cost of that property in the year purchased. And, for assets placed in service in 2008, the amount that may be depreciated is increased to $250K and there is a special 50% depreciation allowance.
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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. |