It’s one thing to have a business that occasionally loses money, particularly in economic downturns. However, having a business or two that loses money every year for a sustained period of time is an invitation for a tax audit.
If your small business fails to turn a profit for three of the past five years, IRS professionals are going to want more than a little evidence of efforts to turn a profit. It’s a huge red flag to wave and a serious indication that perhaps there are ulterior motives for owning and operating your business.
While a startup business may not make a profit in Year One or perhaps even in Year Two, but when no profit is made in the third year or succeeding years, the IRS will begin to think that this “business” looks fishy and worthy of a closer look.
Other things that get extra scrutiny from the IRS for small businesses include putting relatives on the payroll, over-estimating business expenses, and using a company car for personal reasons.
If you would like to lower your risk of an audit or have gotten a notice already, we can help. Canner Brody and Yan is a certified CPA firm that has operated in the Miami area for over 65 years. Simply call 305-728-5109 or 305-231-2150 and ask for Andrew Brody, our Managing Partner.