Ismar Maslić

Montalvo Realty
14585 Big Basin Way, Saratoga, CA 95070
(408) 877-6000

For Small Businesses: How to Prevent an Audit

Image courtesy of Salvatore Vuono and
Image courtesy of Salvatore Vuono and
Most of my business associates and friends know I enjoy do public relations for start-ups and small companies. 

A friend recently suggested I connect with Sean K. Murphy who runs SKMurphy, Inc., ( another company that caters to small companies and start-ups. 

His 10 year old firm excels in customer development and sales leads. Murphy has written four books, has a couple of degrees from Stanford, and has also worked at a bunch of name brand companies so he’s a good guy to know. 

His company coordinates an excellent activity calledBootstrappers Breakfast. They are held in the Bay Area here as well as around the U.S. and in Europe. 

I attended my first one today and thought I’d share the tips from the speaker. Holly DeVito is the owner of Sum of All Numbers (, a book keeping and payroll services firm based in Fremont, who preached that there are seven key things to keep track of carefully when you start an accounting system for your new business. 

Here are the seven deadly accounting sins, and by deadly, I mean bad for your business: 

1. Throwing away business receipts. DeVito says save all business expense receipts over $75.  If you mix business and regular expenses on a credit card, it could cause you accounting problems later so have separate credit cards. 

2. Guessing at which percentage of your automobile expenses are for business. Unless your vehicle is only used for business activities, you can only deduct a portion of the expenses. If the percentage seems too high, it’s a red flag for the IRS. Write down where you drove for business daily and don't just guess at the end of the year.

3. Not locking the petty cash box. Her actual tip was to manage the petty cash box but the key take away for me was to lock it. Sometimes workers just steal a bit of money from the petty cash a little at a time and don’t get caught for many years. 

4. Not understanding which workers are “1099s.” The IRS pays a ton of attention to how business owners classify their help, for example if they are contractors or part time employees. 

An independent contractor is called a “1099.” The high level definition of an independent contractor is: 
You are not directing her work. 
You are not providing her with equipment. The IRS has 18 other factors to determine if a worker is an employee or contractor. This is a complicated area. If you have any questions about the status of your help, it’s best to talk to a professional accounting firm like Sum of All Numbers for help. 

5. Loosey goosey check and bank controls. DeVito says that every check that leaves the office should have back-up documentation for what it is for and be signed by one of the owners. When bank statements come in they should be opened by one of the owners and the checks should be reviewed for the payees and endorsements. She also said to reconcile the entire year for every bank and credit card account you have for business. 

This is a brilliant tip because it’s great “PR” for Sum of All Numbers. Most creative inventors and CEOs cringe at doing something like this. 

6. Deducting 100 percent of business meals and entertainment. It’s actually 50 percent. 

7. Casual personal “donations” to the business account. If you are a consultant, like me, and you cough over some personal funds for early-on expenses, you are required to have a promissory note and a schedule of repaying that loan. So you could “give” your company $200 for graphics and business cards but it must be tracked in the form of a loan. 

DeVito added that if the loan is over $10,000 the business must pay interest on the loan. 

I have a simple method to help me not commit these deadly accounting sins. I think of my business and myself as separate entities. 

Thou shalt not casually just toss money back and forth! 

Every penny has to be properly tracked and accounted for so when tax-time rolls around, it’s way easier to fill out your Quickbooks spreadsheet and there is less of a chance of getting audited. 

On a final note, here are some related Twitter handles to follow: Sean K. Murphy, Bootstrappers Breakfast Meetup and author is@SKMurphy. Sign up for a meeting at if you are thinking about starting a business. The meeting fee is only $5 in advance. 

Holly DeVito of Sum of All Numbers is @HollyDeVito

I’m @FromMichelle on Twitter and I do press relations, corporate messaging and writing for small high tech companies and my company is based in Saratoga.