Startups, Avoid an Audit During Your First Critical Years

Plm consulting firm

It is common knowledge that start up businesses often fight tooth and nail to make it through their first 18 months — and a staggering 80% of them won’t do it. The very last thing that startups and/or small businesses want to add into that equation is an audit from the IRS. Even so, startups — especially small startup businesses — are among the most likely to get audited. What red flags cause the IRS to take a closer look at your return?

Red Flag #1: Unreported Income

Perhaps the largest red flag is unreported — or under-reported — income. “This may seem obvious, but you must declare every penny you earned. Even the slightest variation from your filing and official IRS income records will set off red flags,” USA Today explains. “If your business runs mostly on cash or cash incentives — you’re a taxi driver, car washer, work in a hair salon or bar — you’re more likely to get audited.”

If you have trouble tracking products, services, and related income, you may want to consider reliable product lifecycle management software. PLM solutions and PLM tools help you accurately gauge how much a particular product or service costs — and even projects future profitability (or lack thereof). The same PLM solutions can also help you track specific expenses and income for easy and precise reporting during tax season.

Red Flag #2: Excessive Entertaining

Treating clients to lunch and networking through social events can be an extremely profitable business tool — and you can write off “50% of entertaining and food expenses as a deduction,” according to USA Today. Don’t abuse the privilege. Financial experts concede that the IRS will take note — and investigate — if you do too much (e.g. suspicious amounts of) entertaining.

Red Flag #3: Being Really Charitable

Duping the IRS is no simple feat. “Giving or donating to charity is commendable, but don’t over-exaggerate how much you give. The IRS is aware of how much people around your income level donate, so if you report giving away much more you’re going to raise some eyebrows,” USA Today explains.

Small businesses, don’t add salt to the wound. Don’t add an audit to startup struggles. Avoid tax return red flags, like under-reporting income or taking advantage of business entertaining deductions. Links like this: Helpful research also found here.