By Ted Lanzaro, CPA

​IRS Identifies 5 Key Audit Areas For
Construction Contractor LLCs

Construction business owners operating as single member LLC’s have consistently been the target of IRS audits. They file their business income and expenses on Schedule C of their personal income tax returns. 

The individual construction business owners have a big, fat bull’s eye on their backs when it comes to tax compliance.

Why?

The IRS has determined that construction business owners operating as single member LLC’s have the most likelihood to be underreporting their income or overstating their expenses. This information is based on research done by the National Research Program (NRP), the arm of the IRS that collects data to measure taxpayer compliance.

The IRS has determined the following areas are where most of the “cheating” occurs. If this sounds like you, it’s time to stiffen up your record-keeping and documentation for 2016 in order to minimize the downside if you are audited by the IRS.

The five primary audit areas are:

  1. Income – the IRS suspects are many construction business owners are under reporting their income, not reporting cash income, and/or not properly reporting income earned from barters and cancelled debts​
  2. Car & Truck Expenses – the IRS suspects that many construction businesses are overstating their expenses by either not reducing their costs by their personal usage of the auto/truck or by overstating the number of business miles actually travel every year. This is where keeping a mileage log becomes a record keeping necessity.
  3.    Travel & Entertainment - the IRS suspects that construction business owners routinely deduct personal travel and meals against their business income. Only ordinary and necessary business related expenses for travel and entertainment are deductible. 
  4. Rents – the IRS suspects that construction business owners that own buildings that are being rented from them by their business are overcharging their business for rent in order to avoid self employment taxes. Rents must be “reasonable” and reflect current market rents for the area.
  5. Independent Contractors – the IRS suspects that construction businesses are treating employees as independent contractors to avoid the payroll taxes associated with employees. If you have independent contractors that you are paying, be sure that you are in compliance with the rules that differentiate employees from independent contractors.
  6. There are definitely steps you can take to minimize the risks of being audited in these areas. Proper documentation of deductions is the key. For example, proper receipts, business mileage logs, and independent contractor agreements play a big role as to whether the IRS allows you to keep your deductions during the audit.

    Another better, more proactive strategy would be to select a different entity to run your business such as a corporation, S corporation or partnership. The proper entity selection is based on your unique circumstance and requires professional guidance to determine.

    For more information about tax strategy for construction businesses, contact CPA Ted Lanzaro by clicking here.