The federal government permits a wide range of deductions and tax credits to lessen your income tax burden each year. However, the IRS also has a good idea–based on your income and other factors–which tax breaks you’ll likely qualify for. Therefore, it’s important to be certain of your eligibility for any credits and deductions you claim, because a false claim could raise a red flag for an audit.
If you’re a business owner or self-employed, make sure you have the necessary evidence to back up any of these claims:
- Home office deduction: Just because you have a separate room in your home that you call your office doesn’t automatically qualify you for this deduction. You have to use the space exclusively for business purposes. It can’t double as a laundry room or a space where your kids play video games. It must also be the main area where you conduct your work.
- Exorbitant business expenses: The IRS allows you to deduct business expenses for meals, travel and entertainment. While, on the one hand, you can take your client out to dinner to discuss your new partnership, don’t expect the IRS to overlook it if you claim $300 worth of champagne and caviar as a business expense. Keep detailed records of every business expense you have–including receipts as well as the date, location and purpose of the expenditure.
- Business vehicle expenses: It’s perfectly permissible to claim a deduction for any use of your car for business purposes. However, if you claim to use your personal (non-commercial) vehicle for 100% business purposes, an auditor may raise an eyebrow. Again, keep detailed records–travel log, mileage and business purpose of each trip.
No one wants to face an IRS audit. Nevertheless, if you do find yourself in such a position, hiring an experienced tax attorney can be a smart way to lighten your load.