You may have heard of the Inflation Reduction Act, which was recently passed. As with most government bills, there’s quite a bit in it (more than I can wrap my head around), but with different tidbits floating around, you might be wondering what it means for your business.
On the tax side, there were a few points included. The good news is that unless your business is making over a billion dollars in revenue (in which case you probably wouldn’t be reading this 😜) you won’t be affected by the 15% minimum corporation tax, which has accountants stumped.
Perhaps one of the most talked about points was the $80 billion increase of funding to the IRS, which will be spread out over the next ten years. In my opinion, this is how I see this bill affecting small businesses the most.
The breakdown of funding is spread into a few different categories, the highest being “Enforcement” for $45.6 Billion (69% increase), down to “Tax Payer Services” for $3.18 Billion (9% increase). You may have heard the joke going around that they’ll go from answering about 10% of their phone calls to 20%.
With the majority of the funds going to “Enforcement,” meaning IRS audits, this has brought up concern for many people, namely, small business owners. How will this affect you? Are you going to immediately start receiving an audit tomorrow, or next week?
While it’s being said by politicians that IRS audits will only increase for people making over $400K, the truth is that’s not how the IRS works from what I’ve read and heard from others in the industry.
Audits have been historically low over the last ten years or so, and with this new funding, many tax professionals think that IRS audits as a whole will be increasing. And with that much funding, it seems pretty reasonable to come to that conclusion.
Now, while everyone has a different opinion on what will happen with the audits, the best thing you can do as a small business owner is to be prepared. This means getting your records in order, including having your accounting done properly and keeping all of your supporting documentation.
What can you do about it?
It never helps to worry about things without coming up with a solution. So what can you do? Here are some tips to help you come up with your own plan to be prepared. Make sure to consult with your bookkeeper, accountant or tax professional to get their expert opinion on your specific situation.
- Use an accounting software.
Using a cloud accounting system such as Quickbooks Online or Xero is going to make things so much easier for you. Chances are if you have a bookkeeper or accountant they are using one already.
Trying to manage a spreadsheet is only going to get you so far and is also extremely prone to human error.
- Keep your receipts.
While it seems like a pesky task, keeping your receipts is going to help to back up your expenses in an IRS audit, reducing the chances of certain expenses being disallowed. Your accounting system will have a feature allowing you to simply take a picture of the receipt with your phone, at which point the receipt will be stored in your accounting system. You don’t have to keep the paper copy if the receipt is being stored digitally.
An added benefit here is that the receipt can be matched to the expense itself, making it super easy to find.
- Properly document meals and travel expenses.
As you can imagine, meal expenses are going to be a prime focus of an IRS audit. Many people abuse this expense or don’t keep proper documentation, which can result in the expense being disallowed in an IRS audit.
Make a note on the receipt to include with whom you ate, the business nature of the meal or travel, etc.
- Gather and keep other supporting documentation.
Keep soft copies of banks statements, sales invoices, etc., backing up all of your income and additional expense documentation. The IRS is going to want all of this.
- Keep all of your “corporate” files readily available.
In order to prove you’re really acting like a real business, it’s helpful to have your operating agreement, annual minutes, etc., proving you are following the proper procedures and formalities in your business.
- Meet with your bookkeeper, accountant or tax professional.
Ask them any questions you have, go over any concerns and ask them what they need from you. A simple conversation can help you both tremendously!
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