Think before you deduct: A list of deduction that could get you in hot water

Tax season is a pain. In our industry, it often prompts a flurry of activity as we scramble to gather receipts, tally expenses, and maximize deductions. In the rush to save money on taxes, it can be tempting to push the boundaries of what is considered legitimate. And sometimes people make guesses that can land them in trouble with the IRS.

The Allure of Illegal Deductions

At first glance, deducting expenses might seem like an easy way to lower tax liability. From unreported income to questionable claims on your tax returns, the allure of reducing taxable income can cloud judgment. But CRNAs who have run afoul of the IRS will tell you this: It’s not worth it. The repercussions can be severe, ranging from hefty fines to criminal charges.

Unverified Deductions: A Risky Business

Beyond illegal deductions- we assume there are no actual criminals reading this =), the failure to verify the eligibility of certain expenses can also land CRNAs in hot water. Whether it’s inflating business expenses, claiming personal costs as business expenses, or misrepresenting charitable donations, the risks are significant.

Consider the case of inflating business expenses: While it might seem harmless to pad out deductions for meals, travel, or office supplies, doing so without proper documentation can lead to an audit. If a CRNA is audited, and the IRS determines that expenses were misrepresented or exaggerated, the consequences can include back taxes, penalties, and interest.

Similarly, claiming personal expenses as business costs is a red flag for auditors. Expenses like groceries, personal grooming, or family vacations have no place on a business tax return unless they are directly related to business activities. The IRS scrutinizes such deductions carefully, and taxpayers who cannot substantiate their claims may find themselves in a bind.

The Importance of Due Diligence

So, what can CRNAs with 1099 businesses do to avoid the pitfalls of illegal or unverified deductions? The key lies in due diligence and accurate record-keeping.

  1. Understand Tax Laws: Educate yourself or seek professional advice from a CPA in your state to understand what can and cannot be deducted. The tax code is complex, and what may seem like a legitimate deduction could be off-limits.
  2. Keep Accurate Records: Maintain meticulous records of all expenses, including receipts, invoices, and documentation. This not only helps during tax season but also serves as a shield in case of an audit. We recommend using best-in class expense tracking software like Quickbooks or YNAB.
  3. Separate Personal and Business Expenses: Keep personal and business expenses distinct. This means having separate accounts, credit cards, and documentation for each.
  4. Consult with a Professional: When in doubt, seek advice from a tax professional or accountant. They can provide guidance on eligible deductions, proper documentation, and tax-saving strategies.

Download or Save Lokum App’s second Guide in this series: Think Before you Deduct

*Disclaimer: This is not a financial advice.

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