Small Businesses

Ten simple rules for self-employed small business owners that make winning an IRS tax audit easy

American’s fear the word “tax audit”.

Even the most calm person can be rattled by a letter sent from the I.R.S. especially if it’s requesting a tax audit. It can spell disaster for small business owners, even if they do their own recordkeeping.

If you are sent an I.R.S. Call your tax accountant immediately if you have received an I.R.S. It is your responsibility to locate and supply all necessary documents to win this audit. This will be easier if you have audit-proof records.

Small business owners are often unaware of the importance of keeping audit-proof records. Many people make recordkeeping a tedious, computer-driven task and then forget about it until tax time.

Recordkeeping for business doesn’t have be hard or tedious. To beat a tax audit, there are two things that you can do. The first is to have a straightforward recordkeeping system. The second is to understand exactly what the I.R.S. requires. What the tax-time expectations are for small business owners.

One- or two-person businesses need to keep records in order to meet the I.R.S. So why not keep audit-winning documents? These ten simple rules will help you prepare for a tax audit and simplify your recordkeeping.

Rule #1 – Document income Absolutely all business income, including all cash & tips, must be deposited into a separate checking account used only for business funds. This will ensure that you have 12 bank statements for totalizing your income when it comes time to file taxes.

Rule #2 – Keep a Paper Trail.A paper trail should be kept for every penny you spend or charge to your business. You can create your receipt if one is not available. Be sure to include all details. Small business owners will find it easier to keep track of expenses by using expense receipts.

Rule #3 – Record Barter Exchanges. A paper trail is required for every business barter exchange. It must assign value to your time or the product you traded. Barter exchanges are worth the same as cash sales.

Rule #4 – Keep track of all expenses The business expense alphabet makes it easy to sort receipts. You can deduct any expense that you incur from advertising to Ziploc bags.

Rule #5 – Depreciate Equipment. All equipment with an expected lifespan of 2+ years or more must be depreciated at tax time. Keep a record of all equipment you purchase for your business, including the date and price, so that you can easily access it when filing taxes.

Rule #6 – Log Your Miles.Keep a small notebook in your car to track business mileage, unless your car is being used for business purposes. If you don’t keep an accurate mileage log and are required to submit one for tax audit purposes, you will be disqualified.

Rule #7 – Track Inventory. The I.R.S. All items you purchase or make to resell are considered inventory. You cannot deduct inventory costs until inventory is sold. It is simple to expense inventory once you understand how to calculate its cost per item.

Rule #8 – Get educated. No matter how qualified your tax professional, if you do not provide the correct information and figures, your tax return is likely to be incorrect.

Rule #9 – Plan Ahead. Every year, tax laws change. Ask during your annual tax visit whether there are any tax changes that could affect you. Find out what tax laws are currently in effect, how they affect your business, as well as what you can now do to lower your taxes in the future.

Rule #10: Keep everything.A tax audit will fail if there are no receipts. Keep all your tax receipts in one place. When you receive an audit letter from I.R.S. you can take the bag or box containing your receipts for that year with you to your tax professional.

It’s not my job to tell you not worry about a tax audit. We all do. If you have followed these ten rules, your receipts and audit should be in your bag.

We are a team of professionals with each having two decades of experience in start-ups, sales, marketing, finance, HR, large scale project and profit centre management and running mature cross functional operations. At we are big believers that knowledge transfer is critical to our industry’s evolution. We love to share our experiences and learnings through our online resources.

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