Keeping good records pays in more than one way. With documented income and disbursement records, you can make better business decisions. They'll be an asset at tax time, not only to help you prepare your returns but also to legitimize the information on the returns.

To avoid being audited, always turn in an honest, verifiable account of your business — the deductions you take and the benefits you receive. Be realistic about repairs and improvements to your property. If your deductible business expenses seem outlandish, that might wave a red flag at the auditors and tempt them to look closer. Don't make mistakes when you prepare your taxes, and always pay all of what you owe. Don't play games with the IRS by fudging a little here and a little there on your tax records.

Know exactly what you can claim as deductible business expenses — you don't want to list any money you paid to yourself. Don't confuse deductible business expenditures with those that should be depreciated. Know which things can be categorized as capital improvements and which are considered repairs and maintenance.

When you depreciate property, separate the value of the land from the total value of the property. Land does not depreciate; your building does. Clearly show that you are only depreciating the cost of the dwelling. (See Chapter 9.) And use the depreciation tables correctly. If you're not sure about something, talk to an accountant or another professional who prepares tax returns.