The Straight Dope on Your Business Taxes

About 13% of Americans admit to cheating on their taxes in an annual IRS survey, up by 1% this year-which may not sound like much, until you think about what a large figure 1% of the population’s tax tab is. (Best quote: “I don't consider it ‘cheating,’ but rather a ‘personal bail-out’.”) Of course, it’s difficult to wholeheartedly trust responses to such a survey. Asking this question is much like inquiring, “Do you cheat on your spouse?” How reliable would the results of that survey be? One of the most common questions I hear from entrepreneurs is, “How can I borrow money so I can expand my business?” If you want to borrow money, you have to be able to prove you can pay it back and that you're a good risk. So from that vantage point, when you under-report your taxable income you aren't doing yourself any favors. Demonstrating and reporting healthy business growth is the only way to qualify for a loan. If your venture appears to be tottering or just flat, with no increase in income, no lender will want to invest in you. So why bother? What do you get out of paying taxes? * Roads and transportationrn * Unemployment benefitsrn * Police, fire and EMT servicesrn * Assistance for small businessrn * Medicare and state aidrn * Social Security (maybe!) * Public schools Admittedly, some of these pillars of contemporary civilization are debatable in their merit, and we haven’t even touched on national defense. So we could do quite a bit of philosophizing about whether paying taxes is a moral obligation or not, but there are these much more practical reasons why business owners should be cautious about under-reporting income. Sad to say, you can't have it both ways. If you've made the income, you're better off to report it so that it's all above-board, showing figures that make it clear that you're actually running a profitable endeavor. Otherwise, not only do you miss the opportunity to borrow money and establish a credit history for your business; you also increase your chances of being audited. Paying taxes is about as much fun as buying a furnace, or flossing. Believe me, I know. Most people acknowledge that they are honest in reporting taxable income simply because they're afraid of getting caught cheating. And women business owners are much more likely to overpay on their taxes than men. The reason? They’re more intimidated by the idea of an audit. The most common ways people under-report on their taxes are by inflating charitable donations, and self-employed people who claim personal expenses as business costs. The insanely complicated tax code also contributes to inaccurate tax returns; few people are equipped to actually figure out an accurate report, and just do their best to pick amounts that seem reasonable. Auditors scrutinize expenses like travel, meals and entertainment, and are trained to look at other miscellaneous industry-specific costs. They handle such a high volume of data about people's household expenses that anything outside the range of averages will flag their attention. The IRS finds restaurant owners, clothing store owners and car dealers to be the most likely under-reporting offenders. Salespeople, doctors, attorneys, accountants and hairdressers are close runners up. So if you're in any of these industries, you're already earmarked for suspicion; don't get caught! Keep it simple, I say.