When you have serious tax issues, you need someone who knows tax law

Risks of claiming too many business expenses when self-employed

As a self-employed professional in Atlanta, you’ve likely asked yourself, ‘Can I deduct this as a business expense?’ It’s a common question, but the answer isn’t as straightforward as you might hope. You might be tempted to claim every possible expense to reduce your taxable income, but beware. Claiming too many business expenses can lead to serious consequences, including catching the attention of the Internal Revenue Service (IRS) and potentially triggering an audit.

Missteps in claiming business expenses

When you report excessive business expenses, it may raise a red flag with the IRS. Why? The IRS is on the lookout for deductions that are disproportionately high compared to your income. This discrepancy can trigger an audit, which is a thorough review of your finances and tax returns by the agency.

An audit doesn’t automatically mean you’re in trouble. However, if you can’t support or substantiate the expenses you’ve claimed, you may end up owing back taxes, along with penalties and interest. It’s crucial to keep detailed records of all business expenses. Receipts, invoices, and bank statements can serve as critical proof of the legitimacy of these expenses in the event of an audit.

Business versus personal expenses

It’s important to distinguish between business and personal expenses. Only expenses that are ‘ordinary and necessary’ for your business are deductible. For instance, a web designer might justify purchasing high-end computer equipment as a business expense. However, if the same designer claims a deduction for a new wardrobe, the IRS would not view it as necessary for the business.

Also, consider the home office deduction, especially if you work from home. To qualify, you must use part of your home exclusively and regularly for your business. If you’re also using your home office for personal use, claiming this deduction could land you on the wrong side of the law with the IRS.

Protect yourself as a solopreneur

In the era of solo entrepreneurship, protecting yourself and your business is very important. Why risk losing what you’ve worked so hard to build by being careless with your deductions? Yes, claiming every possible expense as a self-employed individual is tempting, but the potential risks could lead to an audit or worse.

Strive to stay compliant with tax laws, keep detailed records and, when in doubt, consider consulting a Georgia tax attorney. They can guide you through the complex tax landscape and deal with the IRS.