There are legitimate ways to avoid tax issues as a small business owner and we've decided to bring them to your knowledge.
It is no longer news that small business owners are expected to pay income taxes like big business owners.
As a matter of fact, there are cases where one may even pay additional taxes that are specifically associated with small business operations.
But ask any entrepreneur and you'll find out that most of them don’t want to have anything to do with the tax man.
And the interesting thing about this is that the feeling is not limited to Nigerian entrepreneurs, it is the same around the world.
However, it is important to know that there are legitimate ways to avoid tax issues as a small business owner and we've decided to bring them to your knowledge.
Here are audit tips every small business owner should know to avoid tax issues
1. Be accurate in your record
Your chances of getting audited will be minimized if you keep all your business income and expenses in a business bank account and retain your business expense receipts.
This will not only make it easy for you to prepare your tax return, it will also make it possible for you to have everything you need to back-up your return just in case in you're is getting audited.
But when you try to inflate your expenses or deflate your income, you’re likely to get a visit from IRS.
2. Try not report a loss every year
It has been observed that small businesses that usually report loss year in-year out are often targeted for a tax audit.
And apart from being targeted for a tax audit, your business might be determined by the IRS as a hobby and disallow all your business expense deductions.
3. Don't claim a home office if you cannot get a deduction, legitimately
It is true that when it comes to tax audit, home offices are badly reputed as red flags. Nevertheless, things seem to be changing these days, because you can safely take a home office deduction if your space legitimately qualifies.
And with regards to the requirement, the home office must be a separate room that’s used exclusively for business. Using a desk in the corner of the living room and calling it a home office won’t work.
Be that as it may, there are chances that your home office can still create an audit risk if you have large expenses for maintenance or utilities.
It is also possible to for your business to be audited if you claim a home office whereas you have an office space elsewhere.
4. Don't pay overly high salaries to employees who are shareholders
This is not saying that reasonable salaries should not be paid. It is simply saying that paying your executives a high salary can be perceived as a way to minimize corporate profits and therefore pay lower taxes.
When this is seen as the case, chances are your business will be audited because unusually high salaries may open your tax return to scrutiny.
Therefore, it is expected of you to know what a reasonable salary range is for your industry and try to operate within the range.
5. Pay your estimated small business taxes.
Know what you’re expected to pay and make plans to do so because failing to make these payments can result in penalties as well as increasing your chances for an audit.
If your records are good and you’re quite honest in your tax return then there’s no need for you to fear a tax audit.
However, it is advisable to seek tax advice from an accountant if you’re unsure of the income you should report and the deductions you’re allowed to take.