Mistake: Making too many deductions
One of the more glamorized benefits of running a business is getting to make deductions like dinners where business was conducted, business travel, a portion of your rent and more. These are pretty normal deductions for certain businesses, but if you have too many write-offs, it can raise some eyebrows — especially if it may not be considered a reasonable, ordinary expense for the type of business you run.
Deductions lower your taxable income and having too many of them can be seen as if you’re trying to claim personal expenses as business ones, or even trying to evade taxes.
Mistake: Claiming too many losses
A loss is when your business’ expenses and deductions are greater than its gross income. Losses are normal for a business, especially new ones. However, claiming a loss every single year can raise some flags around the legitimacy of your business.
It calls into question whether your business expenses are truly ordinary and necessary expenses, or whether you’re just trying to offset your personal tax bill by claiming business losses.
After too many losses, the IRS may consider your business a hobby and you won’t be allowed to claim deductions for it.
Mistake: Incorrectly reporting your income
The IRS cross-references many income documents (including 1099s, bank statements and other forms), so they’ll know if there are any discrepancies between what you report as your income and what your income actually was. These discrepancies may lead to an audit.
Underreporting business income is a common mistake and sometimes it’s not even done intentionally. Sometimes, you may forget about income from freelance or one-off gigs. Other times, you may think it’s fine to just estimate or round up or down on your income but when it comes to your taxes, you need to provide exact numbers.
Source: CNBC