What To Do Before You File Your Tax Return

March 15, 2007, is a key date if your business is incorporated. It's the deadline for filing your 2006 corporate income tax return, or requesting a filing extension (assuming you're on a calendar–year reporting basis).

Partnerships, LLCs and their owners as well as sole proprietors on a calendar year, have until April 16, 2007, to file their income tax returns for 2006, or request a filing extension. Whether you work with a tax professional or prepare your own return, you'll want to review certain key items to make sure you're taking full advantage of write–off opportunities while avoiding actions that can trigger an audit.

Check and double-check your return

Purchases: It's easy to overlook items you intended to report, even if you use a computer to prepare your return. Software and Internet–based tax preparation includes only the information you tell it to. Here are some things to look for:

Take every deduction and credit you're entitled to. Don't overlook new write–off opportunities. For 2006, there is a one–time opportunity to recoup federal telephone excise tax paid on long-distance service after February 28, 2003, and before August 1, 2006.

Avoid red flags

Certain write–offs can attract a closer look by the IRS. Make sure that you're entitled to the deductions and credits you claim and that you have the records to back you up, just in case you're questioned.

Retain tax records: Keep records of travel and entertainment expenses—key areas questioned by the IRS—for at least three years from the due date of the return (or the date you file, if later). These records should include not only receipts for expenses but also diaries, travel logs and expense account sheets showing the date and purpose of each expense.

Determine eligibility for a home office deduction: If you run your business from home, don't fear that you'll trigger an audit if you claim a deduction for business use of your home. But if you have an office elsewhere and use a home office occasionally, check to see that you're entitled to a deduction in this case. For more information, see IRS Publication 587, Business Use of Your Home, at www.irs.gov.

Filing extensions

If you need more time to complete your return for any reason, here's the form to file and the added time you gain. There is now an automatic 6–month extension for all filers who make a timely extension request. Be sure to pay the taxes owed on time to avoid interest and penalties — a filing extension does not extend the deadline for payment.

Type of return		Form for requesting an extension
Form 1040 (sole proprietors)	Form 4868
Form 1065 (partnerships and LLCs)	Form 7004
Form 1120S (S corporations)	Form 7004

Final review

Each year the IRS identifies common errors and audit targets for small business. Here are some areas to avoid where you should exercise caution:

Compensation to owners: Paying yourself an unreasonably high salary or benefits package if you're a C corporation. Only reasonable compensation is deductible by the business. Alternatively, if you fail to pay sufficient compensation for work performed for your S corporation, the IRS may argue for higher compensation so both you and the corporation pay employment taxes on that reasonable amount.

Worker classification: Erroneously labeling a worker as an independent contractor rather than as an employee. Be sure you don't misclassify workers to avoid paying employment taxes and benefits. If you exercise control over when, where and how the work gets done, the worker is your employee.