10 Tips To Avoid An Audit On Your Small Business Tax Return

“Audit” can be a very scary word to any business owner, especially a small business owner. This is because when the CRA audits your business tax returns, you have to collect all of your past financial documents and explain, in detail, the intricacies of your business.

Largely speaking, small business owners are unlikely to be audited by the CRA. However, that doesn’t give them free rein to do whatever they want, regarding the CRA regulations.

CRA audits don’t necessarily mean you owe the Canadian government money, none less, you should still do all you can to avoid them. Here are 10 tips to help you do just that!

1. File on time and file completely

You should file your tax returns annually, even if your business didn’t turn a profit. Failure to do so will raise suspicions and will alert the CRA.

2. Report the right numbers

Human error is common; however, it is unacceptable to intentionally change your business’ numbers. The CRA will have your previous financial data on record, so will compare your present report with past reports to gauge the accuracy.

3. File your estimated taxes on time

It is crucial that you file your estimated taxes, quarterly. You should keep an eye on upcoming deadlines and make complete payments to the CRA.

4. Don’t abuse your business deductions

Large businesses have more opportunities to take deductions than small businesses, while small businesses have more opportunities than sole traders. However, if your business doesn’t qualify for certain deductions do NOT take them.

5. Avoid reporting only nice, round numbers

Business expenses rarely total to around and even number ($100 or $2,500 etc.), it is in the best interest of your business to record costs, exactly as they appear. Using round, even numbers or totals that end in 0 or 5 ($25 or $50) looks suspicious and may draw the attention of the CRA.

6. Don’t report a personal lifestyle that doesn’t match your income

The CRA reviews your personal tax returns, as well as, your business returns, so the two reports should be similar. If your personal expenses are really high but your business doesn’t turn a profit, there’s a disconnect that the CRA will look into.

7. Your business shouldn’t have lower margins than similar businesses

Typically, large businesses will fall into a certain revenue range, while medium and small businesses will fall into their own respective revenue range. Thus, if your business records unusually low sales or profits, in comparison to similar-sized businesses, it will raise a red flag.

8. Your business shouldn’t consistently lose money

Due to a number of factors, your business will go through financial ups and downs, as a result, there will be years where you file your business taxes stating a loss. However, if this happens year after year, the CRA will wonder how you’re staying in business despite the losses and will likely investigate further. 

9. Don’t show an enormous change in income without documentation

An enormous change in income, negative or positive, will raise a red flag. Of course, that doesn’t mean you should avoid making changes to your business, but it does mean you should be prepared to show the CRA all of your financial documents.

10. Don’t rely too heavily on independent contractors

Misclassifying workers is a common way to avoid paying state payroll taxes, such as disability insurance and unemployment. A business that solely employs independent contractors may draw the ire of the CRA. If your business hires independent contractors, make sure they qualify for that status and are not full-time employees.

The best way to avoid an audit is to file your taxes on time, accurately, and with integrity. By following the above steps, you should avoid any accidental triggers that can bring undue scrutiny and slow down your day-to-day operations while you deal with the inquiry. And hey, if you still get pinged, get together with your accountant and start gathering everything the CRA requests. It’s nothing personal—just business.

Source: business2community.com