Avoid Home Biz Tax Avoidance Schemes

Deduct your baby as a business expense!  Deduct your dog too! I have seen many new “Get Rich Quick” and “Avoid Business Taxes” home business schemes on the Internet lately.  Looks like they are preying on people who are desperate for work and people who are looking for a way to avoid taxes.

Apparently the IRS is getting tired of these scam artists; they have issued a new warning about home business tax avoidance schemes.  These promoters want you to set up a fictitious business or convert a hobby into a “business” in order to take tax deductions for a home office.

Here’s the truth about home businesses and tax deductions:

Home businesses are just like all other types of businesses. You must set up a legitimate business entity, and operate like a real business, keeping records, paying your business bills, and doing all the things a business does.

You must follow the rules. You must have a real office space in your home, if you want to deduct that space.  For example, the IRS article says, “placing a calendar, desk, file cabinet, telephone or other business item in each room does not increase the amount that can be deducted.”

Expenses must be legitimate. If you want to deduct expenses, you must have legitimate expenses to deduct. You can’t just make up stuff, hoping the IRS won’t notice.  Some typical scams the IRS mentions are:

• Paying children a salary for answering telephones or washing cars.
• Deducting education expenses from salaries paid to children wrongfully claimed as employees.
• Deducting excessive car and truck expenses when the vehicle was used for both personal and business use.
• Deducting personal furniture, home entertainment equipment or children’s toys.
• Deducting personal travel, meals and entertainment under the guise that everyone you encounter is a potential client.

Some of these deductions may be legitimate, if you follow the IRS rules.

Hiring your children. You may be able to  hire your children to do legitimate work for your business.  The work must be  “necessary and essential” to your business, and you can pay them a fair wage and they can put that money away for college.  (Of course, there are restrictions on this deduction, and only certain types of business forms can hire children. ) But you can’t deduct their toys or pay them to rake the leaves.

Setting aside a home office space is perfectly legitimate.  The space must be used “regularly and exclusively” for business.  You can’t work on the dining room table, then take away your laptop and set the table for dinner.

It takes work to figure out what is allowed by the IRS and what is not.  But it can be done.  There are many good websites with information about small business taxes, and you can always ask your CPA or tax preparer.  But please be sure to check out anyone who says that can show you how to set up a business and not pay any taxes. Remember, if it seems too good to be true, it probably is.

Image source: Newscom