You may have heard the IRS is increasing its audits of business tax returns—it’s true. But implementing some simple standard business practices will better prepare you if your business is audited:

Deposits

• First, expect the IRS to assume all deposits into your business bank account are income.  Most probably are, but you may have deposited, for example, loan proceeds. 
• Be sure the loan your business received, either from the bank or from your personal funds, is properly recorded with a written loan document. 

Expenses

• Second, expect the IRS to assume all outflows from your business bank account are going to you personally unless you can prove they are valid business deductions. Keep your receipts and statements to show that those deductions actually satisfied a valid business purpose. 
• Be especially careful if some of your vendors also sell to the general public. For example, a construction contractor may purchase from Lowe’s or Home Depot, but without proper documentation, the IRS agent may assume these are personal expenditures.

Comingling

• Never mix business and personal expenses in the company bank account, and avoid directly paying personal expenses from it! Instead, pay yourself a salary and a distribution.
• Keep business items in the business account and the personal items in the personal account.  Comingling of funds can make it difficult to manage the bank account and may, justifiably, raise the suspicion of the IRS agent. Some lawyers contend that this comingling could jeopardize the legal protection of your corporation.
• If you pay an expense personally on behalf of your business, simply complete an expense reimbursement and have the company pay you, the same way you would reimburse an employee. You can find a useful Expense Report template on our website. Click on Tax Center and scroll to the bottom for Excel spreadsheets to properly document your expenses and business mileage.

If you are “lucky” enough to be audited by the IRS, you will now be prepared with the proper documentation.  Of course, if you need the help of a CPA, call us at (904) 396-5400 and we can assist you with the IRS audit process.

Filed under: Tax by Adam Robinson