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 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 2017, the standard mileage rates are:
– 53.5 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 set new guidelines that purchases with a per-item price up to $2500 may be expensed automatically unless you have a written policy allowing for higher amounts to be expensed. Otherwise, purchases should be capitalized.
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.