Business tax deductions come in many forms and amounts. However, some deductions are scrutinized by the IRS more closely than others. While you may not be able to completely prevent being audited, there are several deductions that may make it more likely you will come under the IRS' spotlight. Always be able to support any claimed deductions with receipts or other records.
1. Deducting Your Residence
Just because you work at home does not mean that you can deduct the entire cost of the residence on your taxes. Legally, the only portion of your home that you can deduct is the space you use to work in. Be this the size of your desk, a room, or a combination of the two, you should refrain from deducting any amount not actually used by you during the course of business. Deducting a large portion of your home or the entire home will raise a red flag for the IRS to investigate further. Deducting a majority of your household utilities and other expenses often results in IRS investigation.
2. Disproportionate Deductions
Unless your company is failing, taking an extremely large amount of monetary deduction in business losses that is disproportionate to your company's profits is a red flag for the IRS. Additionally, even if you have just begun your business and it is successful, a large amount of deductions will still attract attention. In any business, there is going to be some loss and reasonable deductions, however, the higher that amount, the more it looks as though you are trying to avoid paying taxes on the business' profits.
3. Large Political Contributions or Donations
While every company is entitled to contribute to political campaigns, a small company with very high or solely political contributions will appear suspect. Such contributions make it seem as though the company was created only to fund the political cause and, as such, will draw the IRS' eye. Regardless of having behaved legally and having receipts for your donations, several or large political contributions will raise a red flag.
It is not just political contributions, though, that draw attention. A business that extensively donates, and particularly non-cash donations, is more suspect than other companies with an average or lower than normal amount of donations. Non-cash donations are any donations not in monetary form, such as services or products. These types of donations are estimated in their value when deducted. However, extensive donation and high estimations raise a red flag.
4. Business Losses
Chances are that your company might have incurred a loss in its first year of operation. It's understandable for this to happen, given the difficulty in setting up and operating a business. However, claiming a loss after several years of operation or in multiple years causes your business to look as though it is a scam solely created for tax breaks. While your business may have lost money more than one year in a row, make sure that you properly document those losses should the IRS choose to investigate.