The IRS Is More Likely To Consider You For Audit If You Have These Business Expenses

If your Schedule C shows losses year after year, and your biggest write-offs are for travel, meals, cars, or other soft expenses, the IRS may take a closer look. The IRS will check if you are running a real business or just an activity that does not aim to make a profit. The IRS will see you as running a business for profit only if you show a profit in at least three out of five years. It will also look at well-known "profit motive" factors to decide if you are really trying to make money. Losses are allowed, but you need to show you are working to earn a profit, not just creating tax deductions to lower other income.

Some tax write-off lines have strict rules. The IRS says you cannot deduct entertainment costs, which may be tricky when you take a work-related vacation. Business meals are usually 50% deductible if they are ordinary, needed for work, not fancy, and you or your worker is there for a real business talk. The IRS removed the temporary rule that allowed a full deduction for restaurant meals, and as of January 1, 2023, the 50% limit came back in place, as stated in Publication 463. Everything depends on having good records. For travel, meals, and items like cars, you need to keep timely records. In short, you need to answer who, what, when, where, and why for each expense. You should also know the effective ways to legally avoid paying taxes.

To claim a home office deduction, the space must be used only for business and on a regular basis, especially for people who work from home. It should be your main place of business or a spot where you meet clients. You can use the simple method, which lets you claim $5 per square foot, up to 300 square feet. Or you use the actual-expense method with Form 8829 to divide costs like rent or mortgage interest, utilities, insurance, and depreciation. Note that you cannot claim rooms with mixed uses unless in special conditions.

For vehicles, you need to choose one method for your deduction. The standard mileage rate for 2025 is 70 cents per mile and if you want to use this method in future years, pick it the first year you use the car for business. The actual-cost method means you track all car costs, like gas, insurance, repairs, lease interest, and depreciation, and then figure out how much is for business use. With both methods, you must keep a mileage log as you go.

Furthermore, large home office deductions or high vehicle costs compared to your income often get extra attention from the IRS. Both write-offs depend on records you keep and how you decide what counts as business use. If your home office or car expenses seem too high for your job or area, or if your logs are not complete, the IRS may ask for proof.

Keep a clear paper trail for your tax records. For meals, save the full receipt and write down who was there and the business reason. For flights and hotels, keep your travel plans, e-tickets, and hotel receipts. Lodging also always needs a receipt. For car mileage, use a log app or a calendar with odometer readings that show the date, where you went, how many miles, and why. For business gifts, note the person's name, your relationship, the date, a short description, and the cost. Remember, you can only claim up to $25 per recipient each year.

The IRS says you should keep records for at least three years after you file your return, so you can prove your numbers if asked. If you leave out more than 25% of your income, keep records for six years. For property, hold on to records until the time limitation is reached, starting with the year you sell the property. IRS Publication 583 explains these timelines for small businesses.

Make record keeping part of your normal routine and use separate bank and credit cards for your business. Write down expenses as they happen and match them with your bank statements each month, so every entry on your tax return links to a real document. For a home office, keep a floor plan note that shows the square footage, copies of utility bills, and your Form 8829 paperwork if you use actual expenses.