We have all read the headlines; “IRS receives $80B to hire 87,000 new agents over the next decade”. Does this mean increased audits? Probably, who knows for certain, but time will tell.
Our role is to help keep you in compliance. Tax avoidance and tax evasive are radically different. Tax avoidance helps lowers your tax bill by PROPERLY structuring transactions, so you reap the benefits within the guidelines of the law. There are times you will feel like the poodle jumping through the ring of fire, but we need to properly navigate the tax landscape to ensure we are entitled to the deductions to lower your tax bill. Tax Evasion on the other hand is illegal and is an attempt to reduce your tax bill through underreporting, concealment, deceit or subterfuge. Tax evasion gets you 3 meals and a cot.
Records to Keep to Allow Deductions in An Audit
1. Vehicle Deductions
Your company owned vehicle can be a great deduction, but it is listed property with IRS, and this means it has specific rules around deductibility. It must be used more than 50% for business (the personal use must be included on the employee’s wages) and a mileage log must be maintained. I know this is not popular, but if you do not keep a mileage log, here is a list of potential audit outcomes:
- a. The IRS will disallow all expenses related to the vehicle (gas, repairs, insurance, depreciation)
- b. The amount paid via the company for those expenses could be deemed compensation to the employee, and they would require this to be added to the W2 wages. The issue is the audit is 2 years in the future, so your tax deposits are now all late and would result in heavy fines and penalties for late payment.
- c. The amount could be deemed a distribution in an S Corp. If you have more than 1 shareholder and the vehicle was allocated to only 1 shareholder, you could have disproportionate distributions and thereby negate your S Corp election. Now your tax planning just blew up, went sideways, and you will be double taxed on certain items of income.
- d. SOLUTION – While we know it isn’t fun – keep a mileage log. MileIQ is an easy app that allows you to swipe right or left for business or personal miles. Remember that mileage to and from your home to your place of business is commuting mileage and not deductible.
- e. Claiming no personal use on a SUV or vehicle is a prime audit flag. IRS knows it is rare that you actually would leave that vehicle at the place of business overnight and drive a different vehicle to and from your home to the place of business. Play by the rules and you get a nice tax deduction. Don’t play by the rules and you can lose more than the deduction.
We as preparers are responsible for the information on the return and have very large penalties for failing to comply with the law. We know our advice is not always what you want to hear, but sometimes it is what you need to hear to keep you safe in an audit and keep more of your money in your pocket.
Thanks for allowing us to help guide you through the complicated rules of owning a business. Contact us today to schedule a meeting with our tax experts.