Your business return is a report to the IRS and to your State Department of Revenue. It says a lot about your business and about you. But it also says one really important thing of which you might not be aware. Your business return says whether you should be audited or not.
Here’s a brief outline of eight mistakes that you want to avoid on your business return by Diane Kennedy CPA:
Mistake #1: Selecting the wrong business type for your business.
There are some basic rules when it comes to selecting the right business type for your business. Don’t put appreciating assets inside a corporation. There are a few (very few) instances where you might need to use a corporation to hold assets like real estate, but for the most part – don’t do it!
Think about the tax election for your LLC. If you go with the basic default of Sole Proprietorship (single member) or Partnership (multi-members) you might not get what you want. Definitely get good tax advice before you make important elections with your tax return.
Mistake #2: Selecting the wrong NAICS code for your business.
The IRS will compare your selected NAICS code with other businesses with the same code. If your business is being compared with a different type, you’ll look off and that’s a bad thing when it comes to the IRS.
Mistake #3: Failing to elect to amortize your start-up costs.
You get a choice with start-up costs – amortize them over 15 years or taking an election to expense up to $10,000 in cost in the first year. But you have to make the election on your return!
Mistake #4: Not selecting the correct accounting methods.
There are three types of accounting methods: cash, accrual and hybrid. It’s amazing how many get this one wrong.
Mistake #5: Not taking the full amount of loss in the start-up year (or for that matter any growth year).
It’s easy to get lulled into a trap of “I don’t owe taxes, so I don’t need to look for deductions.” The problem is that when the business starts being profitable you’ve lost out on possible carry-forward losses. And if it’s not profitable and you have to shut it down, you’ve lost out on possible losses.
Mistake #6: Not reporting inventory for a retail business.
This is a huge red flag for a retail business. If you sell stuff, you can’t take an immediate deduction for inventory you buy. Inventory is an asset, not a deduction. When you sell it, it moves from asset to cost of goods.
Mistake #7: Making a mistake with your salary.
There are two things you can do wrong:
1. Pay yourself a salary when you’re in a structure like an LLC or LP or
2. Not pay yourself a salary when you’re in a structure like an S Corporation.
Mistake #8: Not setting up an audit defense.
There are five things a good CPA will do to prevent an audit:
• Avoid Red Flag Triggers on the initial filing,
• Be over-achievers when it comes to disclosures,
• Keep overall reporting consistent as far as line items (unless obviously wrong)
• Coach our clients on what to keep, how long and why, and
• Proactively react to any IRS inquiry or audit notice.
In today’s audit climate, it’s not just about audit defense. It’s about audit survival!
Here are some recent questions from my blog
QUESTION: Growing our RE business in the US certainly has its growing pains. In structuring our entities, (we function in Florida, Georgia and soon in Texas), we have been informed that, “…your company is a dealer in real estate sales and purchases, not an investor (1031 exchange tax deferral is not allowed for dealers)”.
A more detailed discussion will take place with our CPA, but I would like to hear from some others who “deal” in rehabs within an LLC, s-corp or c-corp.
How are your 1031 exchanges handled? Is this an entity focused restriction, or an activity focused restriction? I see the reasoning on an individual basis, but how many flips does it take before you are considered a dealer?
ANSWER: It all boils down to intent. If you intent is to buy, fix and flip then you are a dealer and cannot 1031 exchange. If your intent is Buy, hold but then decided to flip, then you can 1031 exchange and there is also a holding period requirement when next you want to sell the replacement property for another one. Most people usually recommend 12-18 months but if you are flipping within a short period of time, then you are a dealer and subject to S.E. tax. You could come up with an entity structure that minimizes not eliminated your Self Employment taxes.
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at WealthBuildingPlan
