The IRS does use the expense categories for statistical analysis and outliers may be targeted for audits.  For example, if you have $10,000 in revenue and claim $8,000 in utilities, this may be considered a red flag and could trigger an audit.  If you go through the auditing process and actually have $8,000 of expenses but they just weren't really "utilities" you just threw everything in a single category, it won't make a difference to your tax liability but still your error triggered an audit which is not a pleasant experience.  Another glaring example is throwing everything in the "other expense" category.  There's no better way to tell the IRS that you don't have good records and they should audit to check you out.

People are getting audited at an increased pace, not only for issues like this on a Schedule C but also with their itemized deductions on Schedule A.  When the IRS looks at the percentage of medical expenses and/or charitable deductions that are claimed compared to other people with similar income and finds a person claiming substantially more than normal, it triggers an audit.

That being said, lumping office supplies and kitchen supplies into a single supply category is not really a problem and again, doesn't change your bottom line profit that becomes taxable.  

The only additional info I would contribute is that based on the size of your operation, you may need to break down your perishable vs. non-perishable ingredients for your COGS.  Perishables can pretty much be expensed right away but non-perishables should be inventoried at the end of the year and you should not be "writing off" the cost of this inventory that remains unused in your business. It gets carried over to the next year when it will be used.  Of course, if the value of your inventory is a couple hundred dollars, it may not be worth it and would most likely not be questioned but if you have a retail storefront and keep larger quantities on hand, it's more important to do things the right way, even if they pose an administrative burden.

AAny auditor doing there job will care, regardless of how their day is going. My father owns a business that falls into CRS's high target group, he's been audited a number of times. They are meticulous when going through things. I don't think telling one that"Jason from cc said it was ok to fudge, since it works out the same," is going to fly.

A

The only thing the IRS cares about is that you pay the amount of tax you owe. As I stated above, worst case scenario in the case of the audit is spending some time reclassing expenses. With no additional tax owed, there would be no penalty.

This is more a case of "don't sweat the small stuff" than "fudging", to me the latter term applies more to deducting non-deductible expenses and/or artificially reducing income. There is also some level of leeway given to business owners to determine how to classify expenses.

Want to hear something that will really bend your noodle. Every time you file your 1040 you are complying voluntarily. Don't believe me, look up Title 26 and read the 16th amendment.

The 16th amendment gave the Government no new taxing power since 1916. The word income is not defined anywhere in the IRS tax code. Your income tax is a 100% voluntary tax.

You can take the red pill (say what I stated is a lie) and stay in your dream world or you can take the blue pill (do your own investigation on this law )and wake up.

Welcome to the rabbit hole.

A

False.

http://www.snopes.com/business/taxes/voluntary.asp

AIf income taxes are truly voluntary, why are people arrested, convicted, and imprisoned for tax evasion?

A

If that were true, one would expect all tax evasion cases to be dismissed, but people are routinely found guilty of not paying their taxes.

More info is on Wikipedia (see citations for ultimate sources) if you don't like Snopes: http://en.wikipedia.org/wiki/Tax_protester_statutory_arguments#The_.22income_taxes_are_voluntary.22_argument

A

Relevant SCOTUS case: http://supreme.justia.com/cases/federal/us/362/145/

I'm just the passing information, take it or leave it, it's your decision.

The information you are passing along is too dangerous to let it stand unrefuted.

A

The facts of the relevant Supreme Court case I posted (Flora v. United States - 362 U.S. 145) directly refute your position.

A

The analysis you linked to makes the standard tax denyer error of misinterpreting the meaning of "voluntary" in Flora vs. US. The Justia link I posted above is the official record of that case. The Supreme Court has spoken, there is no other side to this issue.

You are welcome to challenge the validity of paying taxes in court, but first you must pay all tax you owe (according to Flora vs US).

FFS! Can we talk about taxes as they pertain to business? I don't think Enga is actually suggesting people try not to pay their taxes, because even though it may be "technically" voluntary, she knows the IRS will "LITERALLY" lock your ass up after they take everything you own, if you don't. Congress is a buch of power hungry, greedy shysters. 

Can we get back on the proper subject??

As far as mileage goes, I just started entering it into my expenses on cakeboss like this

Walmart-9.8

$5.49

Mileage (category)

5/22/13

The $5.49 refers to the $.56 the IRS lets you deduct per mile. Walmart is 4.9 miles from my door, so multiply it times 2, and multiply that times .56  It is 5.488, and you round to the nearest cent. My bookkeeper told me to that today, so far I am up to $411.56 and I only got through July, so I recommend keeping track!

So... Does anybody who uses cakeboss find the "master materials" and "master ingredients" pretty redundant after entering expenses? I am confident in my pricing, and find it pretty horrible to enter every single item I have used after all the cakes I have done. I just sort of skip that part now. It wouldn't be so bad if you could import the expenses to the other places, but as far as I can tell, you can't.

MAybe it is because I wait until the end of the year to do it all, though :-P