Small Business Audit Chances: 1 in 1,000 vs Average 1 in 100,000 - Learn More

[WLMcCoy]

I read that average people have a 1 in 100,000 chance of getting audited. But if you own a small business (including direct sales) you bump up to a 1 in 1,000... Just curious..

 

[Chef Kearns]

never been audited and been in business for 5 years.

 

[Hathery]

I was wondering the same thing. I usually do my taxes myself, but I was wondering if I should pay an accountant now that I have my own business.

 

[babywings76]

When I started, my banker recommended that I get a business account. He went over a lot of stuff, and frankly, my mind was spinning. I just kept thinking, "all I want to do is be a consultant! I don't think everyone else is doing all this!" He told me that lots of people are getting audited now that the gov't is realizing that people are going extreme with their right-offs with their small businesses.

 

[princessmeshelle]

this is my first year doing PC, but i have always been a little paranoid about being audited. i have always gone to H&R Block cuz i like having that guarantee. this should be interesting this year. but no, to date, never been audited.

 

[cookingwith_tara]

I go to an accountant not a tax preparer because they know of a lot more legitimate claims you can make. When I first started the DS business my 'tax preparer' at Jackson Hewitt tried to call my business a hobby and I ended up paying in. But ever since I've gone to the accountant I get a refund! It's wonderful!

About opening a business account - My credit union told me the only way I would open an official 'business' account was if it was actually MY business. And it's not, it's The Pampered Chef. My idea of business account was just a separate account for my business. Which is not classified as a "Business Account" with the credit union. So I just have a separate account with only my name and my Pampered Chef checks are connected to that. They also told me if I had filed a something something form with the state acknowledging a new business (which we don't) then it would be considered a "Business Account". Hope that helps.

 

[mrssyvo]

I am married to an accountant, and he keeps my books for me (income, expenses, deposits, etc) I have no fear of an audit, but if so I am secure in the fact that I am fine.

 

[babywings76]

I go to an accountant not a tax preparer because they know of a lot more legitimate claims you can make. When I first started the DS business my 'tax preparer' at Jackson Hewitt tried to call my business a hobby and I ended up paying in. But ever since I've gone to the accountant I get a refund! It's wonderful!

About opening a business account - My credit union told me the only way I would open an official 'business' account was if it was actually MY business. And it's not, it's The Pampered Chef. My idea of business account was just a separate account for my business. Which is not classified as a "Business Account" with the credit union. So I just have a separate account with only my name and my Pampered Chef checks are connected to that. They also told me if I had filed a something something form with the state acknowledging a new business (which we don't) then it would be considered a "Business Account". Hope that helps.

That's what I kept asking my banker guy, he just kept telling me he knew what he was talking about, he does accounts for other DS people. I was thoroughly confused, especially when he asked me what I wanted to name my company! I don't have a new company! I'm an Independent consultant, etc, etc, etc. I told him about the company rules about identifying ourselves properly.

 

[cookingwith_tara]

He might THINK he knows what he is talking about but he certainly doesn't understand what you're trying to tell him. I can see why you would be confused . . . But you are absolutely right about identifying ourselves the right way.

 

[legacypc46]

I want to second the comment about accountants vs tax preparers. It seems a lot of store front tax preparers view this as a hobby and simply don't understand this is a business.

I went to one gal who wanted to fight me on just about every deduction...it was as if she thought I was getting over. I dropped her and went with an accountant. She is tough but knows the tax law. She was very clear with me about what was deductable and what was not...and what is gray area.

She says it's this gray area that gets most DS folks in trouble. From what I understand, the key phrase is "within reason." For example, how many times can you deduct the ingrediants for a practice recipe? There's no hard and fast tax rule that says PC consultants can deduct x-amount of practice runs per recipe. After discussing it, we went with two times: once to learn it, once to perfect it. That's our interpretation and one we're willing to defend with an auditor.

I know in a previous thread someone commented that they were told they could deduct their microwave because we're 'chefs'. I think I slept thru that part of my PC training cause I can't find my chef certificate. I personally believe an auditor would poke holes in that unless you can prove you use it exclusively for PC or can document the percentage of time you use it. I use my refrigerator to store perishable ingreadiants, but I wouldn't want to try defending even a percentage of that.

The good news is there is so much we CAN deduct: business supplies, groceries for practice recipes, mileage to buy those groceries, postage, laptop exclusive for business, etc. (One mileage comment. Someone posted in an earlier thread that their preparer said we couldn't deduct mileage to shows because that was our place of business. I say BS; my place of business is my home office. A show is simply the result of the work I do in said office.)

Anyhoo, if you have doubts about your deductions, invest in an accountant...preferably one who either is already familiar with DS deductions or is smart enough it doesn't matter. And if your gut doesn't feel right, feel free to change. It's your money they're advising you on.

 

[FHL]

Thank goodness I didn't make that much yet this year. I am horrible at keeping receipts and track of my mileage.

Do you actually write down the mileage when you start and end a trip. I took the HR Block course last year and that is what they said the IRS now requires. I'm never going to be able to remember to do that.....

 

[legacypc46]

I note in my day planner where I went business-wise and then mapquest it later for the mileage. I also write down my mileage at the beginning of the year just so I can show a starting point if asked, but I'm personally comfortable with my mapquest log.

No way am I organized enough to do a traditional log.

 

[cookingwith_tara]

I have this cute 4x6 book I keep in my car and I write the starting mileage when I leave and the ending when I return. When I get home or usually sometime within the week I'll bring it in and enter it on P3. When I put in the ending and starting mileage P3 calculates total miles for me and gives me the expense in dollars. I'll also type in the description whose show it was for or which packets I mailed out or whose groceries I purchased. It does seem like tedious (sp?) work but I promise you it will definitely be worth it.

I also found out through my accountant that you can claim portions of your phone (as long as your message is advertising your business) or in my case my cell phone. I have a boost prepaid and it's mainly for my business. I just keep all the cards or receipts and I always enter it on P3. I also get to turn in a portion of my electric bill, we calculate a portion of the sq. ft. of my home as I have one room completely for my office. My vehicle, since this is my only job, and it has advertising.

I don't understand how or how much I just know she's real strict when it comes to backing yourself up with receipts and making sure what you're claiming is directly related w/out any second thoughts. If you have to 'reason' your way through a claim - it's not going to get claimed.

 

[Hathery]

My director told me you could deduct 1/3 of all groceries because we're "in the business of food", and that we could deduct some of the heating/cooling costs if we have a room in our home that's used as an office. That sounds a little fishy to me....any thoughts?

 

[cookingwith_tara]

I don't know about 1/3 of ALL groceries because you would not be using ALL the groceries you buy for Pampered Chef, would you?

But yes on the cooling/heating. I'm able to print a report of the year's electric bills and turn it in because I do have an office in my home strictly for PC.

 

[chefsteph07]

5 years in and not been audited...thank goodness..but I have been getting better EVERY YEAR w/ my documentations, so I'm not too worried about it. I don't try to take ridiculous deductions...I have a friend who does Tastefully Simple and she told me that someone in her group writes off ALL HER GROCERIES...I said, wow, that's one heck of a write off, she's lucky she doesn't get caught in that!

 

[floccies]

My account said we could deduct 1/2 the cost of practice recipes.

 

[pamperedbecky]

That's what I kept asking my banker guy, he just kept telling me he knew what he was talking about, he does accounts for other DS people. I was thoroughly confused, especially when he asked me what I wanted to name my company! I don't have a new company! I'm an Independent consultant, etc, etc, etc. I told him about the company rules about identifying ourselves properly.

My bank kept telling me the same thing. No matter how I explained it, she just didn't understand. Now every time she brings it up, I say no thanks.

 

[chefsteph07]

My bank kept telling me the same thing. No matter how I explained it, she just didn't understand. Now every time she brings it up, I say no thanks.

You tried to get an account and your bank wouldn't allow you to, but now they bring it up to you?? How weird! I'd tell them, no thanks, already tried that but you turned me down..." See what they say...

 

[legacypc46]

My director told me you could deduct 1/3 of all groceries because we're "in the business of food"

That would be out of my personal comfort zone; not sure how it can be a one-size fits all percentage (ie. family of 5 versus single person).

My account said we could deduct 1/2 the cost of practice recipes.

He/She may be applying the 'meals rule' (I don't know what it's actually called). Essentially, we can deduct 1/2 of any meals we eat in the course of our business such as meeting with clients, leads, etc. Does your accountant understand that practicing a recipe is a required aspect of the business? I frequently practice a recipe, taste it, and then give it to others for their feedback. I view it as a separate expense. (That's my personal view and one I am willing to defend in an audit...your comfort zone may vary.)

 

[Yakmama]

wait.. should I not have a "business checking account?" Cause I do--- is that bad??

 

[chefsteph07]

That would be out of my personal comfort zone; not sure how it can be a one-size fits all percentage (ie. family of 5 versus single person).



He/She may be applying the 'meals rule' (I don't know what it's actually called). Essentially, we can deduct 1/2 of any meals we eat in the course of our business such as meeting with clients, leads, etc. Does your accountant understand that practicing a recipe is a required aspect of the business? I frequently practice a recipe, taste it, and then give it to others for their feedback. I view it as a separate expense. (That's my personal view and one I am willing to defend in an audit...your comfort zone may vary.)

I'd agree w/ that, I always deduct the full price of practice recipes

 

[cookingwith_tara]

I have a checking account that I use strictly for my business. To me, it's my business checking account but to the credit union it's just a checking account. It's a good idea to have separate account away from your personal one.

 

[Yakmama]

I have a checking account that I use strictly for my business. To me, it's my business checking account but to the credit union it's just a checking account. It's a good idea to have separate account away from your personal one.

Yeah- but mine is officially a business account- not just a separate personal account. Should I change it to personal?

 

[cookingwith_tara]

We were talking earlier in this thread about how some banks try to get you to open a 'business' account for your business. We can't actually have a formal 'business' account because it's not 'our business' it belongs to The Pampered Chef. And there would be forms for you to fill out about your 'business name' and such. Read on the first page for more info on that.

It's always good to keep your business separate from your personal account so there aren't any mix ups or accidents when it comes to deposits and withdrawals. I know in the beginning I did not do that and they questioned why all of a sudden were there tons of deposits each week and big withdrawals. So I opened a separate account and right in the beginning there were big deposits and withdrawals so no questions.

 

[esavvymom]

My DH and I have various 'business ventures' over the years- and we've always avoided claiming home office space or heating/cooling bills on our tax deductions. That opens you up to more questions- since I believe the IRS rules are that something for business- should be strictly business. SO for our home office- since it's my personal office where I do bills, check personal email, have personal papers, and has his office, it would not be 100% my business office. Things like that are what open home businesses up to more audits- trying to claim something as business, when it is not exclusively business.I always air on the side of caution. *I am not a tax professional...just a regular house wife who pays the bills. *

 

[legacypc46]

... and we've always avoided claiming home office space or heating/cooling bills on our tax deductions. That opens you up to more questions- since I believe the IRS rules are that something for business- should be strictly business. SO for our home office- since it's my personal office where I do bills, check personal email, have personal papers, and has his office, it would not be 100% my business office.

The way my accountant describes it, it's all or nothing. She says during an audit to expect questions like, "Do you read personal emails in your office?", "Do you have non-business phone calls in your office?", etc.

[Please bear in mind, most of us are simply sharing our understanding of what is deductable and what isn't; none of us are actual accountants. :blushing:]

 

[chefann]

I've always heard that, while a home-based business is an audit flag, taking home-office deductions is a big red audit flag that GREATLY increases your chance of audit. It's not worth it, in my mind. Of course, part of that is because I don't have a dedicated office room that's used exclusively for that either.

 

[dianevill]

I've always heard that, while a home-based business is an audit flag, taking home-office deductions is a big red audit flag that GREATLY increases your chance of audit. It's not worth it, in my mind. Of course, part of that is because I don't have a dedicated office room that's used exclusively for that either.

My accountant has told me the same thing - big red flag. I don't have a big enough house to dedicate one room solely to PC.

I've been selling for 8 years and haven't been audited (knock on wood). I keep meticulous records, though, so I'm not worried if I do (other than it would be a big pain!)

Food - I've been told we can write off practice recipes two times. I buy most of the groceries for my shows, so I write those off, too.

Cell Phone - I write it all off; I only use it for PC.

Cable - I write off 10% - I watch Food Network for tips.

Internet - I used to write off half, but now my day job company pays for it, so I lost that deduction.

Mileage - my accountant did say that you can't write off mileage to and from shows unless you have a home office. I do anyway. I figure if I get audited I'll say I have a home office I just don't claim it (hey - I'm saving the IRS money by NOT claiming it).

Clothes - some people believe you can write off any clothes you're wearing to PC shows. That is NOT true - only clothes that have PC on them (and you'd write off the clothes as advertising).

Chef Success - claim it - you're educating yourself on the business.

Donations you make to churches, schools, etc. can be written off. Be careful, though, how you write them off. If the organization is not a 501(c)3 (most schools and home and schools are NOT), you can't write it off as a charitable donation. You'd write it off as advertising/marketing.

Just about anything you're going to see on your 1099 from PC that says "other income". This other income is being put back in your business (if you earned anything from the It's In The Bag promo that will show up as other income, but you're using it for your business, so turn around and write that off).

Cookbooks and magazine subscriptions - write them off - you're educating yourself.

A tip my ED shared with me: If you're taking someone to lunch on PC, such as a host, potential recruit, your team members (mainly for directors on that one), instead of buying lunch buy gift cards close to the amount you expect to spend before you eat (like literally 5 minutes before). Give the person(s) you're dining with the gift card(s) before you eat to "pay for their own meal". You can completely write off the gift card as a business expense (gift), but if you just paid for the meal, you could only write off half.

She does this at Christmas. She takes her team out for lunch at Paneras, and hands everyone a $10 gift card when they sit down to pay for their lunch.

Oh - one more thing. You do not need a business account, you should just have a separate personal account for PC. Lots of banks charge extras for having a business account.
Hope this helps!