Date: July 28, 2022
How to Protect Your Business from a Common Mistake
As a new business owner, there are many roles you must play to keep your business running effectively. Although you will likely make mistakes, it’s perfectly natural and you will learn and grow from them. Here are some ways to save yourself from making some of the more costly mistakes.
You may be aware that you should save business receipts for monthly accounting and tax purposes, but how in depth should your documentation really be? While it is always a good idea to make sure that you keep accurate records when it comes to your business expenses, it doesn’t have to be as stressful and time consuming as you may think. Technology can (and should) be leveraged to make this all a LOT easier for you. Besides needing the information to file your taxes, having accurate records can help you make better decisions and avoid frustrating, difficult pitfalls. Always make sure you are protecting yourself while taking advantage of any tax savings opportunities, because if you ever get audited it’s always better to be prepared and able to show the legitimacy of your deductions. After years in the industry, we have seen a pattern unfold, whereby clients receive the tax benefit but let compliance fall to the wayside, and when the time comes to justify their tax strategies, serious consequences arise because good corporate governance was not maintained at the corporate level. The time, energy, expense, and stress involved in preparing for IRS audits or litigation are significantly increased when good governance, corporate legitimacy and management of the corporate entity is not maintained on an ongoing basis.
Here is a valuable example of keeping good records, in the case of Kellett Vs. Commissioner. In 2015, Kellett got audited by the IRS. In 2013, while working for another company, he had started his own website, but didn’t launch it until 2015. He had a plan in place, and the site didn’t start generating revenue until 2019. On his 2015 tax return, he deducted $20,509 paid to the engineers that worked on his site, $2,410 paid to a marketing professional, and $1,856 for cell phone and internet. During the audit, the IRS denied all business expenses. Kellett of course did not agree with the outcome, so he took his case to court.
Long story short, the court cited that under the Cohan Rule, it may estimate a business expense should a taxpayer not be able to substantiate its amount. This means that they will of course choose the option that makes the taxpayer pay the most. Because of the lack of documentation, the court determined only $5,000 was deductible, and $159 for his cell and internet. What a loss!
This drives home the fact that proper documentation is key! More is always better than less. If you are unsure whether you have accurate records, or good corporate governance, we would be happy to help you. Click here to schedule a call with us.