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Ten most used tax deductions for small business owners
  1. Auto Expenses
  2. Home Office
  3. Legal and Professional Fees
  4. Business Meals and Entertainment Expenses
  5. Travel Expenses
  6. Expensing Deduction
  7. Health Insurance Premiums
  8. Bad Debts
  9. Retirement Plan Contributions
  10. Interest Payments
Three Main Types of IRS Audits

There are three main types of audits done by the Internal Revenue Service.
  • The simplest is the correspondence audit. You will get a letter from the IRS requesting that additional information be mailed to them or that a proposed additional amount of tax be sent in.
  • The second level of audit is the office audit. You will be asked to bring certain information to the IRS office for review.
  • The most complete audits are called field audits. They are conducted at your place of business. It is best to avoid these if possible. Once the agent is at your place, he or she has much more to see and ask about.
  • Avoiding an IRS audit

    Although there's no proven way to avoid an IRS audit, there are steps you can take to minimize your odds. The best way is to carefully review your risk and to take special precautions with items that might trigger the attention of the IRS. Here are some preventive measures.
    • Supply Required Social Security Numbers

      This includes yours, your spouse's and your dependents'. If you're claiming the dependent care credit, you'll also need to include the Social Security or tax identification number of the care provider. Divorced taxpayers who pay alimony must provide the Social Security number of the ex-spouse to whom they make payments.

    • Check Your Math

      If the IRS's computer catches math mistakes on your return, it's possible an IRS employee may take a second look at what you've filed. To avoid attracting unwanted attention, be sure to verify your math. If you use tax preparation software, you probably don't need to worry, but it doesn't hurt to double-check.

    • Report All W-2 and 1099 Income

      Your employer reports to the IRS on Form W-2 the annual income you are paid. Freelance earnings are reported on Form 1099, as is income from banks, brokerage houses, mutual funds, and others who pay you income. The IRS computers automatically match income reported to the IRS with income shown on the taxpayer's return. To avoid an audit, be sure those figures match. If your W-2 or Form 1099 is wrong, ask the issuer to file a correction.

    • Be Neat

      A sloppy return may suggest to the IRS that your tax reporting practice may be careless as well.

    • Sign Your Return

      Remember, if you file jointly, both spouses must sign and date the return. Failure to include all signatures means your return is incomplete in the eyes of the IRS.

    • Explain Large or Unusual Deductions

      For taxpayers who have something unusual to report, a good strategy is to attach a statement to the return explaining the atypical item. For example, if you have a high amount of work-related expenses that are not reimbursed by your employer, an explanation may satisfy the IRS agent and avert a notification.

    • Avoid Inconsistencies

      You should be aware, too, that the IRS establishes norms for such deductible items as charitable deductions and home mortgage interest, based on income ranges. For example, a taxpayer showing an income of $25,000 who claims to have put $5,000 in the church collection plate is likely to raise IRS suspicions.

    • Claim Business Expenses With Care

      How you generate your income may increase your chances of being audited. Business expenses and home-office deductions, in particular, invite scrutiny. That's because the IRS recognizes that if you are self-employed, you have more opportunities to claim personal expenses as business deductions. Take the deduction you deserve, but be sure you have the receipts and records to back them up.

      Are you taking a deduction for expenses related to a home office? The home office deduction is one of the IRS's favorite audit targets. If you have any questions concerning your eligibility, check with a CPA to see if you qualify.

    • Keep Accurate Records if You Are in a Cash Business

      Occupations in which workers receive much of their income in cash, such as those in the food and entertainment industries, are often a target of IRS scrutiny. Generally speaking, the more cash you receive and the higher your income potential, the more likely the IRS will want to take a second look at your return.

    Zhai & Wang, LLP thinks no matter how careful you are, you just can't avoid being audited. Receipts and records that substantiate your deductions and the expenses you report can help you through the audit process.

    AMT and ISO Stock

    Basically, the Alternative Minimum Tax (AMT) is designed to guarantee you pay some minimum tax when you have tax saving preference, i.e. gain on exercise Incentive Stock Option. For those tax preference, you normally don't pay any income tax. But in the AMT, they are being added back to your regular income and then calculate AMT tax at 26%-28%. If the ending result and AMT tax is computed higher than your regular income tax, then you have to pay the AMT tax. Of course, if you sell the same portion of the stock in the same year, then you won't have AMT tax scenario, you just pay straight it as salary income if they are ISO in the nature. However, if you sell it in the future, say over a year after you exercised it, also assuming you hold it over the ISO required period, you will be able to recognize it as long term capital gain which taxed at 20% current. Secondly, if you sell it within a year after the exercise day, you will have to recognize the compensation income of the gain from the exercise price to the selling price. But you would say, what about the AMT tax you already pay for the prior exercise. That will be treated as AMT credit to lower your current year's regular income tax to that year's AMT tax amount, assuming you don't have any new AMT tax preference this year. If you do have new AMT tax preference, the calculated AMT tax might be higher than the regular, then you have to defer the AMT tax credit to the future years. So the tax planning is important for those who would pay AMT and need to know when they should to exercise more or sell more in the coming year.

    Please consult with us about your AMT situation, if you don't have transaction like exercising ISO, and suspect you owe AMT tax

    Capital Gain or Loss

    You can turn unrealized capital loss (paper loss) from current stock market's drop to offset your early capital gain. All you need to do is to sell you losing stock by the end of next year. You can then write off any amount of capital loss against an equal amount of capital gain.

    Once you run out of gains to be offset, you can apply as much as $3,000 in unused losses annually against ordinary income. Any additional capital losses can be carried forward to later years indefinitely.

    But, just be ware of 30 days wash sales rule placed before and after on the date you make short-term capital loss -- that is: don't buy the same stock back within 30 days, otherwise, you won't be able to offset the gain. But you always can buy the similar sector's stock at any time.

    Wash Sales

    Case 1: How to Calculate wash sales' basis - Stock repurchased with 30 days.

    Example: 1) If I bought a stock 10 shares for $10/share and sold it for $8/share. 2) Within 30 days, I bought same stock 20 shares for $15/share and then sold for $12/share still within 30 days. 3) Again within 30 days from the first sale, I bought same stock 20 shares for $11/share, several months later(in next tax year), I sold the stock for $7/share. How should I calculate the loss? Again, thank you very much even if you may not have time to respond.

    Aanlysis: See if I can do this calculation to make you clear, First, remember the formula for the stock basis in wash sale = 1st purchase price + 2nd purchase price - 1st sell price+.....+ nth purchase price - (n-1)th sell price.

    Therefore, your first wash sale involving 10 share, the basis need to be carried forward to next time sell, and the basis= 10+15-8=17 per share. Another 10 share you can report loss =15-12=3 per share if you don't buy some amount share in 30 days.

    Unfortunate, you did buy. So the first 10 share in the 2nd cycle of wash sale. Its basis=17+11-12=16, this time, you made final sale, the loss on the 10 share is 7-16=-9 per share. The 2nd 10 share, you also made final sale, its basis before sale=15+11-12=14. The loss you can report on sch. D =7-14=-7 per share. Hopefully, I made you clear.

    Deduction Often Missed
    • Employee's moving expenses.
    • State tax paid during the year.
    • Job hunting cost.
    • Accounting fee for tax preparation.
    • Improvement to your home.
    • Casualty and theft loss.
    • Foreign tax paid.
    • Margin account interest expenses.
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