As I read today’s headline about another scandal at the IRS, I ponder why more business owners don’t do proactive tax planning with equal enthusiasm as the IRS seems to have for squeezing every last nickel that they can from them. Never mind the ACA putting huge financial requirements for employers of a larger size in place, the small business owner of America, the backbone of America, has once again, it turns out, been targeted by people in the IRS. ALI MEYER of the AP wire reported on September 15th “IRS audits disproportionately target small businesses.” “Former IRS employee reportedly says that there is the inconsistent treatment of small versus large companies.” The article goes on to say, “The highest number of audits for 2014 of individual tax returns with business income was in the range of $200,000 to $400,000, amounting to 50% of all audits of upper-income individual returns. Williamson said, indeed, the chances of a schedule C being audited are almost twice as great as a small corporation being audited.”
This isn’t the first time the IRS has gotten caught or accused of having their hands in the pockets of different groups, but the point I’m trying to make isn’t about the AP wire news release, but about the business owners! They often don’t properly plan, legally and ethically, to avoid paying tax in a legal manner, because they’re too busy and are intimidated, sometimes afraid of the IRS. On the other side of the camp, at least some employees of the IRS, apparently are plotting directly against them. Small business in America needs to find the courage to actively plan to reduce their taxes!
For instance, many business owners are somewhat timid about categorizing meals and entertainment as a business expense, but our experience when working with business owners is if you own a business, you’re almost always working. We will review with a business owner their daily and weekly activities and then see what their processes are for keeping track of meals that turn into business meals by accident or mileage for trips where personal business and regular business are mixed together in one occurrence. The answer is most of the time, out of a caution for not doing the wrong thing with the IRS, if a meal turns into a business meal by happenstance it’s not deducted!
They’re having lunch at their favorite lunch spot, and then all of a sudden, a prospective client, recognizing them, says hello. They reply, “Let me buy you a cup of coffee or a sandwich.” That meal started out personal but has turned into a business meal. That receipt hardly ever goes into the box of receipts to be deducted for a business expense. The same with mileage. A trip to drop off their daughter or son at school and then to Home Depot to pick up business equipment and then to Staples for marketing supplies and then to the office doesn’t go on a business mileage ledger, as they felt that the trip to the school and ultimate destination, the office, meant that it truly wasn’t “business miles”. In reality, each section of that trip, having a different purpose, two out of the four destinations being business related, some of that mileage is likely deductible.
There are much larger examples, like section 179, which allows business owners to fully deduct very large purchases and take 100% of their tax deduction all at one time rather than depreciating equipment over five or seven years. Many accountants caution their clients to take the depreciation anyway rather than take an all-at-once expenditure. That advice shouldn’t be automatic. A small business owner needs to look at their year and determine does this year have an anomaly of additional incomes that won’t be repeated in the future? If the answer is yes, then a full deduction of business equipment all at one time could be very smart.
However, if the business is going to have the same income or higher and long, slow, steady, projected growth, then perhaps depreciation over a period of time is then the correct thing to do. Very few business owners demand Tax What-Ifs from their accountants. They don’t talk to them until it’s time to get something in March or April, when in actuality, all business owners should demand of their accountants, a sit-down rough-in of their tax return in the months of November and December, prior to the end of the filing year so that they know what they’ll need to do to counteract any anomaly taxes that may occur. Small businesses need to take the reins, get more proactive, demand things of their tax offices, and have processes for wanting to make their life deductible. They need to get proactive in order to counteract the other human behaviors that are unfortunate, but part of a growing anti-business culture.