How to Stay Out of Trouble with the IRS: Smart Tax Strategies for Small Business Owners
Everything you wish they taught in school about taxes, documentation, and building a financially resilient business.
Running a small business is exhilarating—but the IRS doesn’t care about your dreams, your hustle, or your passion. They care about your paperwork.
In my recent conversation with Roger Pearson—an IRS Enrolled Agent and master tax advisor—we unpacked the essential steps every entrepreneur must take to avoid nasty surprises (or worse, audits). Here are some of the highlights and lessons you can put into action today:
1️⃣ Ignorance Is Not Bliss
Most small business owners don’t fail because they’re bad at what they do—they fail because they never learned the basics of business structure and tax compliance. If you think you can “just hire someone to figure it out,” think again. You need enough knowledge to:
Vet the professionals you hire.
Understand what questions to ask.
Recognize when something feels off.
2️⃣ Know Your Legal Format and Tax Structure
There’s a world of difference between a sole proprietorship, an LLC, and an S Corporation. For example:
Sole Proprietors: Pay 15% self-employment tax plus income tax—often totaling 25–50% of profits.
LLC: Offers liability protection but, for single-member LLCs, the IRS still treats them as sole proprietors for tax purposes.
S Corporation: Allows profits to be categorized as investment income rather than earned income, saving you 15% in payroll tax—but it requires formalities like payroll, shareholder meetings, and more complex filings.
When should you switch to an S Corp? Generally, when net profits hit $70–$100k annually. But you need a pro to guide that decision.
3️⃣ Track Everything—Properly
One of the biggest deductions is mileage—but it’s also the most commonly disallowed because people don’t keep proper logs. Don’t rely on guesses or napkin math. Use apps to track:
Mileage
Expenses
Receipts
Depreciation tables
If you get audited, the IRS only cares about documentation.
4️⃣ Plan Ahead—Every Year
Too many owners wait until tax season to think about taxes. By then, it’s too late to adjust. Instead:
Meet with your tax advisor in October or November.
Estimate what you’ll owe.
Plan your cash flow.
Explore legal ways to reduce your tax liability.
5️⃣ Depreciation Is Your Friend
Large purchases like equipment, furniture, or computers can be deducted over time—but you have options:
Standard Depreciation: Spread out deductions over 5–39 years.
Section 179: Accelerate and deduct more upfront if it helps your tax strategy.
A good advisor will help you decide when to accelerate or delay deductions based on your revenue forecast.
6️⃣ Separate Your Accountant from Your Tax Professional
It may seem efficient to have one person do everything—but getting a second perspective can uncover mistakes or missed opportunities.
7️⃣ Always Document Everything
Roger’s #1 rule for avoiding IRS trouble:
“Be able to prove everything you tell them. As long as you have it documented, you won’t have a problem.”
Takeaway:
Building a successful business isn’t just about making money—it’s about staying organized, planning ahead, and learning enough to make smart decisions (and avoid costly ones).
If you do nothing else, remember this: the IRS doesn’t care about your money—they care about your paperwork.
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