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Did you know that something as simple as a misclassified import duty or an inconsistent cost-of-goods calculation could invite unwanted attention from the IRS?<\/p>\n
For food manufacturers and distributors operating domestically and internationally, the stakes are even higher. A misstep on your tax return can raise red flags across multiple agencies, including the Food & Drug Administration, U.S. Customs and Border Protection and foreign tax authorities.<\/p>\n
When it comes to dealing with the IRS, honesty is always the best policy. Here are the top audit triggers for food and distribution businesses \u2014 and how to stay ahead of them.<\/p>\n
Excessive deductions (especially import and supply chain costs)<\/strong><\/p>\n As a business owner, you’re entitled to deduct certain expenses to lower your taxable income. But don’t overdo it. In the food industry, common deductions include the cost of goods sold, cold storage and warehousing fees, and freight and logistics costs.<\/p>\n If your deductions appear disproportionately high compared to your revenue, the IRS may suspect you’re padding expenses. Keep accurate records of every deduction, including receipts, invoices and freight bills.<\/p>\n Consistent business losses in a tight-margin industry <\/strong><\/p>\n Food distribution is a low-margin business, and losses happen. But reporting losses year after year can catch unwanted attention. Authorities may question whether your operation qualifies as a legitimate business or a hobby.<\/p>\n To counter this, maintain a clear business plan, financial projections and statements<\/a>, demonstrating that you’re actively managing costs, negotiating supplier contracts and investing in growth.<\/p>\n Transfer pricing and cross-border transactions<\/strong><\/p>\n If your business buys from or sells to related foreign entities \u2014 such as an overseas parent company, subsidiary or affiliated supplier \u2014 the IRS requires that those transactions reflect arm’s-length pricing.<\/p>\n It\u2019s important to maintain thorough transfer pricing documentation to demonstrate that your cross-border deals are priced at fair market value.<\/p>\n Sizeable charitable donations<\/strong><\/p>\n If your food business donates excess inventory to food banks or hunger relief organizations, those contributions can generate valuable tax<\/a> deductions. But sizeable donations can raise eyebrows, especially if yours is large relative to your net income.<\/p>\n Document every gift with receipts, inventory records and fair market valuations. Ensure all recipient organizations meet IRS guidelines<\/a> for qualified charitable status.<\/p>\n Large cash transactions, common in international food trade<\/strong><\/p>\n Cash-intensive businesses in the food and distribution space need to be especially careful. The IRS requires reporting of all cash transactions exceeding $10,000, including cash equivalents like cashier’s checks, money orders and bank drafts.<\/p>\n International transactions add another layer of complexity, and large wire transfers and foreign payments can also draw scrutiny from both the IRS and FinCEN. Keep meticulous records of all transactions, regardless of currency or payment method.<\/p>\n Personal use of business vehicles and equipment<\/strong><\/p>\n If your operation runs delivery trucks, refrigerated vehicles or warehouse equipment, any personal use of those assets must be accounted for on your taxes.<\/p>\n Keep detailed mileage logs and usage records for every vehicle and piece of equipment, and be sure to separate business use from personal use.<\/p>\n Compliance doesn\u2019t have to be complicated<\/strong><\/p>\n Running a food manufacturing or distribution business means balancing complex IRS rules, FDA regulations, customs requirements and international trade law. Learn<\/a> how the team at Magone & Company can help your food or distribution company manage risk and stay audit-ready year-round.<\/p>\n This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance specific to your unique circumstances.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" Did you know that something as simple as a misclassified import duty or an inconsistent cost-of-goods calculation could invite unwanted attention from the IRS? For food manufacturers and distributors operating domestically and internationally, the stakes are even higher. A misstep on your tax return can raise red flags across multiple agencies, including the Food & Drug Administration, U.S. Customs and Border Protection and foreign tax authorities. When it comes to… Read More<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[3],"tags":[],"class_list":{"0":"post-178","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-compliance","7":"entry","8":"has-post-thumbnail"},"_links":{"self":[{"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/posts\/178","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/comments?post=178"}],"version-history":[{"count":1,"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/posts\/178\/revisions"}],"predecessor-version":[{"id":179,"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/posts\/178\/revisions\/179"}],"wp:attachment":[{"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/media?parent=178"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/categories?post=178"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.myfoodcpa.com\/blog\/wp-json\/wp\/v2\/tags?post=178"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}