Small Business Tax Trigger Events
In the world of small business ownership, dealing with taxes can often be a daunting task. To help navigate this complex landscape, it's essential to understand the common audit triggers that the Internal Revenue Service (IRS) looks out for. This article focuses on these triggers, with a special emphasis on businesses that transact in cryptocurrency.
First and foremost, maintaining accurate records of all business transactions is crucial. However, for businesses dealing with cryptocurrency, the stakes are higher. Unreported cryptocurrency income or gains is a significant audit trigger. Failing to report crypto transactions, especially when the IRS has records like 1099s or data from crypto exchanges, can lead to an audit. This includes not filing Form 8949 for crypto trades or ignoring the crypto question on the tax return.
Another common trigger is when deductions disproportionate to income are claimed. For example, if a business reports significant deductions compared to its reported income, it can raise red flags, particularly for sole proprietors filing Schedule C. Excessive deductions, such as claiming $40,000 in expenses on $75,000 income, can lead to an audit.
Recurring business losses can also be a red flag. Consistently showing losses over multiple years may lead the IRS to reclassify the business as a hobby and disallow deductions. Cash-heavy businesses, such as salons or contractors, are also scrutinized for possible underreporting of income.
Businesses dealing in cryptocurrency must also be aware of the IRS's requirements for proper reporting. Skipping required crypto tax forms, not properly using Form 8949 to report crypto transactions, or ignoring IRS Notice 2014-21 requirements for fair market value calculation for each transaction can trigger audits.
The IRS treats cryptocurrency as property, so every sale, trade, or use of crypto for purchases can be a taxable event. Mining or staking rewards also generate taxable income. The IRS is increasingly focused on crypto due to its potential for unreported income.
To avoid an audit, it's recommended to ensure deductions are proportionate to income. If unsure about deductions or tax returns, consulting a professional tax planner is advised. Using a tax software system can provide a layer of protection against an IRS audit, as it automatically checks for accuracy and errors. Using a debit card or credit card for business expenses can also help avoid an audit.
It's important to note that a small business may be subject to an audit if total deductions exceed 52% of its income. Large home office expenses can increase the risk of an audit, as the IRS does not want business and personal finances to blur.
Lastly, the IRS is particularly interested in taxpayers who deal in digital assets and have money stashed outside of the U.S., especially in countries with reputations as tax havens. The IRS limits non-cash charitable contributions to 30% of the donation.
In summary, key audit triggers related to crypto for small businesses revolve around improperly reported or unreported crypto gains, mismatched income/deductions, cash-intensive operations, and repeated losses, combined with failure to follow IRS crypto reporting rules. By understanding these triggers, small business owners can take proactive steps to minimize their audit risk.
- In the realm of businesses involving cryptocurrency, the omission of reporting crypto income or gains is a significant audit trigger, especially if the IRS has records such as 1099s or data from crypto exchanges.
- If a business dealing with cryptocurrency fails to file the appropriate tax forms, like Form 8949 for crypto trades, or ignores the crypto question on the tax return, it can potentially lead to an audit.
