Lessen Your Salon’s Chances of an IRS Audit
The thought of an audit by the Internal Revenue Service is terrifying for anyone. However, for some businesses like salons and spas, it may be more likely than you might have imagined. Below are some ways to reduce any red flags not to mention your chances of receiving that dreaded call from the IRS.
Businesses that deal in cash transactions or any service industry that takes tips, are among the most likely to be audited. This includes salons and spas, as much of the tipping comes in the form of cash. To avoid the most common cause of an audit, arm yourself with meticulous bookkeeping. And in case it’s not obvious, always declare all income, including tips.
Never try to write off personal expenses as business expenses. Clearly separate your records (and your accounts) otherwise, in the case of an audit, the IRS will dig even deeper… And nobody wants that!
If all of your amounts in your bookkeeping have zeroes at the end, such as $50.00 etc., it may be a red flag. In such a case, the IRS may think that your business is estimating amounts versus using actual figures.
If your business has relatively high deductions compared to the amount of income it generates, it may raise a red flag. Keep carefully detailed records, and make notes as needed to justify any legitimate expenses.
Home Office Deduction
For some reason, the IRS is especially interested in enforcing the provision that involves the deduction for a home office. If you use one of your rooms at home as an office that is 100 percent for business, you may be entitled to write off that portion of your home for business. However, you should carefully weigh the benefits of such a deduction over the increased likelihood of an audit.
If your business doesn’t show some sort of a profit for three out of five years, the IRS may consider it a hobby… and you can’t write off a hobby. If you are having issues showing a profit, work with a business advisor or your Certified Public Accountant to find ways of trimming back some of your expenses and / or operating more efficiently. It’s expected to run at a loss for the first year or two of business, but anything after that should be operating in the black.
The Right Help
To help run your business more effectively, be sure to use the right tools. Salon and spa management software is a great place to start to get and keep your business organized and running smoothly. Also, it’s always a good idea to use a CPA come tax time. These smart steps are well worth the relatively minor expense and can help make tax preparation, not to mention avoiding an audit, that much easier.